Evaluating Business Incentives Through DEA: An Analysis on Capitalia Firm Data

We analyse the impact of business incentives on the technical efficiency of Italian manufacturing firms. Using DEA allows a novel treatment of the omitted-variable and sample-selection bias. Through DEA one carries out direct comparisons between similar observations akin to those carried out in non-parametric matching analysis. The selection bias can be treated by conditioning these comparisons on the variables ruling the distribution of state aid. We separately utilise four Capitalia surveys, in order to test whether policy effectiveness has changed during the 1990s. Moreover we consider separately the effects of the three main kinds of state aid to manufacturing (soft loans, grants, and tax rebates). The results indicate that state aid had a negative impact on technical efficiency. However, this impact mostly relates to soft loans, and looses significance in the late 1990s.