Burden Sharing and Optimal State Aid Schemes

The European Commission attaches great importance to a shared investment burden when it comes to projects supported by state aid. The presence of own funds, whether they are coming from the beneficiary company itself or from other investors, signals that the beneficiary believes that the project is sound and can also contribute to limiting the possible distortion of competition. More specifically, substantial levels of equity ensure that the aid is kept to a minimum, a key principle when evaluating aid measures. This paper builds a model of optimal state aid schemes, taking into account this very important principle of burden sharing. Our model distinguishes between three sorts of state aid, two kinds of politicians and three types of entrepreneurs. The presence of equity increases the attractiveness of government guarantees in cases of failing entrepreneurs for both kinds of politicians: the ones aiming to maximize the externalities of the projects subsidized, as well as the ones acting with overall welfare in mind.