Indecent proposals: Estimating the impact of regional state aid through EU guideline compliance

This paper estimates the causal effects of Flanders' main industrial policy programme, aiming to support economic development in lagging municipalities. The identification strategy exploits a State Aid reform which required Member States to propose a designation methodology and a selection of eligible municipalities in accordance with the new guidelines. While the proposed designation indicators allow us to account for selection on observables, further compliance with State Aid guidelines make causal inference possible. Additionally, we exploit exogenous intervention in the selection of municipalities, as the first regional aid map was not accepted by the European Commission. We find strong evidence for a 10% effect on manufacturing employment, largely explained by jobs safeguarded in declining industries.