DP17004 Making Subsidies Work: Rules vs. Discretion

Author(s): Federico Cingano, Filippo Palomba, Paolo Pinotti, Enrico Rettore
Publication Date: February 2022
Date Revised: February 2022
Keyword(s): employment, investment, political discretion, Public subsidies, Regression Discontinuity
JEL(s): H25, J08
Programme Areas: Labour Economics, Political Economy
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17004

We estimate the employment effects of a large program of public investment subsidies that ranked applications on a score reflecting both objective criteria and local politicians' preferences. Leveraging the rationing of funds as an ideal RDD, we characterize the heterogeneity of treatment effects and cost-per-new-job across inframarginal firms, and we estimate the cost effectiveness of subsidies under factual and counterfactual allocations. Firms ranking high on objective criteria and firms preferred by local politicians generated larger employment growth on average, but the latter did so at a higher cost-per-job. We estimate that relying only on objective criteria would reduce the cost-per-job by 11%, while relying only on political discretion would increase such cost by 47%.