The Effects of Public Aid to Private Investments on Firm Performance: The Case of Trentino

We examine the effects of local public policies aimed at stimulating the private sector by means of subsidies. Our goal is that of understanding. the level of coherence between publicly stated goals of the regional policy-maker, the actual shape of the subsidies, and their effects at firm level. The relevance of this goal stems from two considerations. First, the design of public policies aiming at stimulating private entrepreneurial activity is a central issue in the literature, but empirical findings do not provide a clear cut interpretation of their impact. Second, in Italy, local industrial policies have been growing in importance in recent years. In order to address these problems, the analysis uses a new dataset including the whole population of firms in the Italian province of Trentino and detailing the effects of the two main regional laws regulating subsidies of the last 15 years. At a methodological level, we use the propensity score matching approach in order to disentangle the effects of policies on firms' productivity, profitability, and growth. Results show that aid policies, in general, have the ability to modify entrepreneurial decision-making about investments. From a policy perspective, local public aid seems to be able to foster growth, however this does not translate into a better economic performance. Moreover, from the comparison of the two laws we can conclude that policy design matters: results are more significant whenever goals are clearly incorporated into the provisions of the law, especially when linked to a sound model for the expected outcomes.