When local politicians decide the allocation of subsidies, the cost per new job goes up 42 percent compared to a system based on objective criteria. This is the finding of the study Making Subsidies Work: Rules vs. Discretion, published in Econometrica. 

Using a sophisticated “natural experiment” offered by Law 488/92, the largest business aid program ever implemented in Italy, and analyzing data from more than 77.000 projects with machine learning techniques and advanced econometric models, researchers Federico Cingano (Bank of Italy), Filippo Palomba (Princeton University), Paolo Pinotti (Bocconi University) and Enrico Rettore (University of Padua) were able to compare two different logics of fund allocation: one based on technical rules (such as the size of private investment and the number of new jobs expected) and one driven by discretionary political assessments, often linked to territorial priorities set by regional administrations.

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