Making Subsidies Work: Rules vs. Discretion

Mer, 30/03/2022 - 12:00 / 13:00

401, Viale Romania

Speaker: Paolo Pinotti , Università Bocconi

Authors:

Federico Cingano (Bank of Italy)

Filippo Palomba (Princeton University)

Paolo Pinotti (Bocconi University)

Enrico Rettore (University of Padua)

Abstract:

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 heterogeneity of treatment effects and cost-per-new-job across inframarginal firms. Both 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%.