Investment Crowding-Out: Firm-Level Evidence from Germany

LICOS Discussion Paper 370/2015

34 Pages Posted: 23 Jul 2015

See all articles by Pavel Ciaian

Pavel Ciaian

Catholic University of Leuven (KUL) - LICOS Center for Transition Economics

d'Artis Kancs

Catholic University of Leuven (KUL) - Faculty of Economics and Business - LICOS Centre for Institutions and Economic Performance

Jerzy Michalek

European Commission. DG JRC Joint Research Center

Date Written: July 2015

Abstract

The main objective of the present paper is to estimate the extent to which firm investment is substituted (crowded-out) by investment support policies granted under the EU Rural Development Programme (RDP). In the empirical analyses we employ the difference-in-difference propensity score matching approach, which allows us to address several important sources of bias, such as selection bias, the simultaneity bias, and functional form misspecification, from which many previous studies suffer. Using panel data of 1,333 firms from the Schleswig-Holstein region in Germany, we find that the crowding-out effect of the RDP is close to 100%, implying that firms use public support to substitute for private investments. Furthermore, no evidence was found that, due to RDP programme support, firms would have brought forward their investments planned originally in a later period, rejecting the f inter-temporal substitution of investments.

Keywords: Investment subsidy, crowding-out, substitution effect, additionality, subsidy leverage, propensity score matching.

JEL Classification: F1, O1, R3, R4

Suggested Citation

Ciaian, Pavel and Kancs, d'Artis and Michalek, Jerzy, Investment Crowding-Out: Firm-Level Evidence from Germany (July 2015). LICOS Discussion Paper 370/2015, Available at SSRN: https://ssrn.com/abstract=2634922 or http://dx.doi.org/10.2139/ssrn.2634922

Pavel Ciaian (Contact Author)

Catholic University of Leuven (KUL) - LICOS Center for Transition Economics ( email )

Waaistraat 6 - box 3511
Leuven, 3000
Belgium

D'Artis Kancs

Catholic University of Leuven (KUL) - Faculty of Economics and Business - LICOS Centre for Institutions and Economic Performance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Jerzy Michalek

European Commission. DG JRC Joint Research Center ( email )

Via E. Fermi 2749
Brussels, B-1049
Belgium

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