Clientelism or Efficiency? The Costs of Politics-Driven Subsidies
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.
A stark comparison: efficiency versus discretion
The study estimates:
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a system based entirely on objective criteria would have reduced the cost per new job by 11 percent;
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a system based only on political discretion would have increased it by 42 percent;
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an “optimal” allocation, built with data on actual project returns, would have cut costs in half, generating the greatest benefits in the South.
The study also shows that politically favored firms were often located in more disadvantaged areas with higher youth unemployment, but this is not enough to counterbalance the resulting inefficiency.
The lesson for Europe investors
The research comes at a crucial time: with industrial policy returning to the top of the agenda, from Europe's Green Deal to the U.S. Inflation Reduction Act, the focus is not only on how much to spend, but how. And the answer from this study is clear: the quality of allocation is as decisive as the quantity of resources.
“It's not enough to spend more: we need to spend better,” as Paolo Pinotti, professor of economics and Dean of Faculty at Bocconi and Enrico Rettore, professor at the Department of Economics and Business Sciences at the University of Padua put it. “When funds are allocated based on political assessments and not on objective criteria, we risk wasting valuable resources, especially in areas where they would be needed most.
For public subsidies to truly create jobs, innovation and sustainable growth, we need more transparency, rigorous ex ante evaluation and less room for political discretion. Efficiency in public spending is not just a technical matter: it is a duty towards citizens.
Title: Making subsidies work: rules vs. discretion - “Econometrica” - 2025
Authors: Federico Cingano, Filippo Palomba, Paolo Pinotti, Enrico Rettore