Determinants of State Aid to Firms: The case of the European Car Industry

Using an original database for the 1992–2008 period, we investigate the determinants of state aid to the automotive industry in the European Union (EU). We find evidence that EU policies have been effective in reducing state aid and re-orientating it toward horizontal objectives. However, national politics still have considerable relevance. During election years, governments are more generous, and this is particularly true in EU countries with proportional representation. Finally, a strategic game between countries seems to take place, whereby a country’s decision to grant aid seems to be responsive to aid previously granted by other member states.