Subsidizing the Unknown: The Hidden Trade-offs in Europe's AI Support Schemes

Diemo Dietrich, Thomas Gehrig and Rune Stenbacka

No 21942, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: The European Commission's AI Action Plan commits over EUR 30\,billion to foster AI innovation while ensuring compliance with the regulatory framework established by the AI Act. Promoting capability development and enforcing compliance creates a dual mandate that may generate tensions. To analyse these challenges, we develop a micro-founded model of an AI developer who makes three sequential choices: capability quality, compliance evaluation intensity, and irreversible deployment infrastructure. Its behaviour partitions into three regimes: abstention, signal-contingent scaling, and unconditional scaling. Compute and training subsidies increase capability quality but may suppress compliance evaluation. In contrast, compliance evaluation support, such as the AI Act Service Desk, expands the signal-contingent regime. Infrastructure co-investment then risks inducing unconditional scaling. These results highlight the challenge of aligning EU AI support schemes with the objectives of the AI Act.

Keywords: Real options; Artificial intelligence; EU AI Act; compliance evaluation; regulatory approval; matching subsidies; Capital irreversibility (search for similar items in EconPapers)
JEL-codes: D83 L15 L51 (search for similar items in EconPapers)
Date: 2026-09
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP21942 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:21942

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP21942

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().