Making Subsidies Work: Rules versus Discretion
Federico Cingano, Filippo Palomba, Paolo Pinotti, Enrico Rettore
Econometrica · 2025 · Volume 93 · Issue 3
Abstract
We estimate the employment effects of a large program of public investment subsidies to private firms that ranked applicants on a score reflecting both objective rules and local politicians' discretion. Leveraging the rationing of funds as an ideal Regression Discontinuity Design, we characterize the heterogeneity of treatment effects and cost-per-new-job across inframarginal firms and estimate the cost-effectiveness of subsidies under factual and counterfactual allocations. Firms ranking high on objective rules 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 42%.
Keywords
Public subsidies, investment, employment, political discretion, regression discontinuity
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