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Essays on the Economics of State Aid

Friday, 4 May, 2012 - 16:00
Campus: Brussels Humanities, Sciences & Engineering campus
Faculty: Social Sciences and Solvay Business School
Caroline Buts
phd defence

Within the European Union, governments are not free to act at will when providing aid to firms
or industries. The European Commission has the task to review proposed aid measures of EU
Member States. The PhD consists of five essays studying the economics of State aid. The first
essay explains the legal background of EU State aid policy and econometrically reviews the
decision making practices of the European Commission with regard to State aid cases. The most
important determinants of the Commission’s decisions are the year of notification and the format
of the aid: more recently notified aid measures have a higher possibility of receiving a positive
decision, and State aid plans under the form of a scheme or a horizontal measure are more often
evaluated positively, whereas ad hoc types are not.

Questions are being raised about the welfare standard used when evaluating Member States’ aid
plans. More specifically, a shift from a focus on producers and markets toward broader welfare
measures, including the effect on consumers, is called for. In response, the second essay models
the effect of subsidies, one specific State aid measure, on consumer’s surplus. A duopoly in
Bertrand competition is studied. The effect of granting a subsidy to either one or both duopolists
is calculated and compared to a situation without aid. This model allows a quantification of the
effect of subsidies on consumers and thus measures the impact of this aid measure on the enduser
of a product or service. In a case analysis, this can be added to an evaluation of the
competition effects and the cost of the subsidy to broaden the welfare standard used.
The next two essays look at the influence of State aid on market shares at the beneficiary as well
as at the industry levels. The third essay empirically studies the effect of subsidies on market
shares. All capital grants recorded in the firms’ financial statements are taken into account. We
find a positive correlation between the total amount of subsidies going to a firm and the
evolution of its market share. In other words, companies receiving high amounts of subsidies
experience an increase in their market shares. A noticeable effect becomes visible two years after
the subsidies have been granted. The fourth essay builds on the previous one to look at the effect
of subsidies on industry concentration. The analysis confirms that subsidies are positively
correlated to changes in concentration. Industries receiving high amounts of subsidies thus
experience a shift towards less intense competition.

In search of a possible explanation for the continuing high subsidies, inspiration was found in the
voting literature. The last essay studies one possible motivation for granting subsidies. Voting
literature puts subsidies in relation to (expected) electoral results. When studying spending on
subsidies, it becomes clear that governments seem to believe that they are able to influence
voters by granting subsidies. Flemish election results are studied in combination with data on the
amount of subsidies going to firms. A positive correlation makes clear that constituencies with
firms receiving higher subsidies give more electoral support to incumbent parties.
The findings of the five essays are finally combined to suggest improvements to the current
European State aid framework

PDF icon Buts_a.pdf