How are growth and productivity in private firms affected by public subsidy? Evidence from a regional policy

The paper provides a statistically robust evaluation of the impact of state aid on capital accumulation in subsidized firms. The analysis considers subsidies allocated to the southern Italian regions over the period 1996–2004 under the regional policy, Law 488/1992. We apply an MDID estimator, taking selection on observables and non observables into account. Results evidence a higher growth in output, employment and fixed assets in subsidized firms but a lesser increase in Total Factor Productivity than in unsubsidized firms. The negative impact on long term productivity and growth reduces the positive temporary effects of regional subsidies.