Is subsidising tourism firms an effective use of public funds?

This study assesses the impact of state aid on firms in the tourism sector by implementing an accurate micro-econometric evaluation of their causal effect. Analyses consider subsidies allocated by the main regional policy in Italy, the Law 488/1992, during the period 1999–2003. A Matching Difference-In-Difference (MDID) estimator is applied, considering the presence of selection on observable and non-observable factors. Effects on the tourism sector are compared with those in the manufacturing industry. The impacts with respect to different types of tourism destinations where tourism firms operate are also evaluated. The results show higher output and employment growth but lower labour productivity dynamics in subsidised firms relative to non-subsidised ones. The impacts are diverse across types of tourism destinations.

► We investigate the impact of subsidies allocated by the Law 488 to tourism firms in Italy.
► We use a causal approach, by implementing a MDID estimator.
► Subsidized firms show higher output and employment growth than not subsidized ones.
► Subsidized firms evidence a lower labour productivity dynamic.
► Impacts are diverse from those of manufacturing industry and vary across tourism destinations.