The Optimal State Aid Control: No Control

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Title:The Optimal State Aid Control: No Control
Creators:
Gregor, Martin
Roháč, Dalibor
Journal or Publication Title:
AUCO Czech Economic Review, 3, 1, -
Uncontrolled Keywords:State aid, signaling, career concerns, aid control

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.

Official URL: http://www.ceeol.com/aspx/issuedetails.aspx?issueid=AB75E7B0-2069-4446-AD02-CF2F5370B632&articleid=3A763B16-F32A-46D9-8DCC-D6453288A4C6

Title:The Optimal State Aid Control: No Control
Creators:
Gregor, Martin
Roháč, Dalibor
Uncontrolled Keywords:State aid, signaling, career concerns, aid control
Subjects:H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
H Social Sciences > HF Commerce
Divisions:Section of external journals > AUCO Czech Economic Review
Journal or Publication Title:AUCO Czech Economic Review
Volume:3
Number:1
Page Range:-
ISSN:1802-4696
Publisher:Charles University
Related URLs:
URLURL Type
http://auco.cuni.czPublisher
http://avi.lib.cas.cz/node/183Publisher
ID Code:4332
Item Type:Article
Deposited On:01 Jun 2009 18:33
Last Modified:01 Jun 2009 16:33

Citation

Gregor, Martin; Roháč, Dalibor (2009) The Optimal State Aid Control: No Control. AUCO Czech Economic Review, 3 (1). -. ISSN 1802-4696

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