Regulating State Aid: Inter-jurisdictional competition, public choice and corporate governance

Abstract

Subsidies and other forms of state aid to firms can be an important instrument in the toolkit of politicians in order to pursue their objectives, while the regulation of state aid can put significant constraints on governments’ decision-making (de Cecco, 2013). European state aid control, in particular, is concerned with maintaining competition among firms without distortion by state interventions (Kerber, 1998). Yet, state aid control not only protects competition among firms, but is at the same time also an instrument to conduct industrial policy (Gomez-Barroso and Feijoo, 2012). In order to fully understand the possible effects of state aid and to design an optimal regulatory design, it is crucial to disentangle the various processes concurrently at work and to consider them against the backdrop of the institutions in which they take place. Modern societies are characterized by delegation. Citizens elect representatives to act on their behalf. Shareholders of a firm hire managers to take care of the day-to-day business. In many occasions, but especially in times of crisis, these agents get together and strike deals. Governments might pledge tax cuts or subsidies if the managers agree to build a manufacturing plant within the state’s jurisdiction. Governments might also want to rescue an ailing firm and save jobs. In summary, this book pinnacles around three paramount concepts: • Inter-jurisdictional competition, that is, a race between various levels of government for jobs and firm location • Delegation, that is, politicians and corporate executives acting in their own interest or the interest of lobbying groups, and • Decision-making under risk and uncertainty. It proposes a view that reconsiders European state aid control as an economic order in light of the potential contracting problems involved.