Public subsidies, TFP and efficiency : a tale of complex relationships

This paper shows that a suitable decomposition of TFP can be applied to a large sample of subsidized firms for a relevant period of time, allowing an evaluation of the impact of subsidies on either the roles of technical progress and technical efficiency change or scale and allocative efficiency change as determinants of granted firms’ long-term growth. We measure and decompose TFP using a Stochastic Frontier Analysis (SFA). The impact of capital subsidies on the different components of TFP is captured by a quasi–experimental method (Multiple RDD), exploiting the conditions for a local random experiment created by Law 488/92 (L488), which has been an important policy instrument for reducing territorial disparities in Italy. The main findings from the case study are twofold. First, capital subsidies positively affect TFP growth in the medium-long term and not in the short term. The main reason is that allocative efficiency has a positive effect only after 2-3 years. Second, the positive impact comes especially through technical progress and not through scale impact change, as may have been expected