Determinants of State Aid

Abstract

From economic theory we derive a set of hypotheses on the determination of state aid. Econometric analysis on EU state aid panel data is carried out to test whether the determinants we expect on the basis of theory, correspond to the occurrence of state aid in practice in the EU. We find that political and constitutional characteristics play a significant role in explaining differences in state aid across EU countries. In addition, there are indications that the unilateral incentive for governments to provide state aid – to improve the position of its exporting firms against international competitors – is still in effect in practice, despite the presence of EU state aid control aimed at reducing this unilateral incentive and pursuing the EU’s joint interest. The estimation results however provide indicative information that state aid control is effective.

Keywords: state aid, subsidies, intergovernmental competition, constitutions, political economics, econometrics

JEL Classification: D62, H2, H41, L13, P16