Governments all over the world grant different types of subsidies to firms which are said to have a lack-of-capital problem. However, it is unclear if governments have the information and motivation to target firms which have problems to finance profitable project via the private capital markets. Based on hypotheses derived from interest group theory, this paper compares (econometrically) characteristics of Swedish firms targeted for selective regional policy supports with randomly chosen non-supported firms. The results give some support for an interest group interpretation of the allocation of subsidies.
Introduction: In Sweden as well as in other countries and in the EU, public subsidies have been granted to firms in order to increase or uphold growth and employment in regions which are lagging behind. To motivate the subsidies in Sweden, basically two arguments have been used. The first one is a social argument which says that the government should help firms with economic problems in order to uphold the level of employment in backward regions. This argument was especially important in Sweden during the economic crisis in the 1970s and early 1980s. The second argument, which is more important nowadays, says that it is the role of the government to reduce different market failures and especially to mitigate lack-of-capital problems that hinder profitable firms from investing in profitable projects (for a further discussion, see e.g. SOU 1996:69 and section 2 below).
Author: Fredrik Bergstrom
Source: Stockholm School of Economics
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