This study analyzes the advantages and disadvantages of revolving funds as an instrument for European and nationale cohesion policy. The report shows that two separate issues must be distinguished. First, funds offer the possibility of intertemporal optimization in subsidization policies. Second, the subsidies can be handed out either as credits or as grants. Intertemporal optimization is a strong argument in favour of funds as the efficiency of subsidization policies can be increased significantly.
This study also sheds some light on possibly critical cases for the applicability of revolving funds. Problems might occur where high initial subsidies are necessary to initiate industry clusters or to attract multinationals in a setting of global fiscal competition. Under these circumstances revolving funds might not be able to achieve the necessary subsidy rates, and grants might be the preferable instrument.
In most cases, however, revolving funds offer advantages compared to grants. In particular, revolving funds offer a better risk selection of funded projects and are more appropriate to overcome problems of credit rationing.
Leßmann, C. et al. (2008): Revolvierende Fonds als Instrument zur Neuausrichtung der Förderpolitik, ifo Dresden Studie 44, Munich/Dresden.
Leßmann, C. and B. Schirwitz (2008): Revolvierende Fonds als Instrument zur Neuausrichtung der Förderpolitik, in: ifo Dresden berichtet 02/2008, p. 11-18 (Download, PDF, 466 KB).
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