Publication detail

The Optimal State Aid Control: No Control

Author(s): doc. PhDr. Martin Gregor Ph.D., Dalibor Roháč
Type: IES Working Papers
Year: 2009
Number: 14
ISSN / ISBN:
Published in: IES Working Papers 1/2009
Publishing place: Prague
Keywords: state aid, signaling, career concerns, aid control
JEL codes: D72, D78, D82, H25
Suggested Citation: Gregor, M., Roháč, D. (2009). “ The Optimal State Aid Control: No Control ” IES Working Paper 14/2009. IES FSV. Charles University.
Grants: GACR 402/09/1066: Political Economy of Voting Behavior: Rational Voter Theory and Models of Strategic Voting IES Research Framework Institutional task (2005-2011) Integration of the Czech economy into European union and its development
Abstract: We extend a model of wasteful state aid in Dewatripont and Seabright (2006, Journal of the European Economic Association 4, 513--522) by a supranational controlling authority. The model combines moral hazard and adverse selection to show that politicians fund wasteful projects to signal their effort. Voters, unable to observe project benefits or effort, reward funding with a reelection premium that separates a high-effort politician from a low-effort politician. We examine state aid control by a benevolent authority which receives extra signals about the state of the world. We find that signals on the politician type are worthless. For signals on the project type, we derive a sufficient condition for aid control to unambiguously decrease welfare. We also prove that politicians do not respond to marginal changes in incentives. In this setup, the optimal state aid control is fairly often no control.
Downloadable: WP 2009_14_Gregor, Rohac

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