State aid in times of crisis: is it always good aid? An analysis of the European automobile market case Laura Grigolon, Nina Leheyda, Frank Verboven March 2012 Abstract During the crisis, governments granted large amounts of public support to save their national automobile producers. We ask whether this aid was warranted. We rst estimate a demand model with product di/erentiation. We then perform policy counterfactuals to assess the consequences of alternative plausible scenarios absent state aid. We simulate mergers, rm restructuring and bankruptcy of the ailing rm. We apply the analysis to the three main aid recipients during the crisis, namely Peugeot- Citroºn, Renault and Opel. We nd that state aid is warranted when it avoids dramatic reductions in product variety or the bankruptcy of the ailing rm. State aid is not warranted in most cases when we balance its cost with the consequences of a merger on consumer surplus and welfare. Our ndings suggest that the European Commissions decision to relax state aid control rules during the crisis may not have been justied. Laura Grigolon: University of Leuven. Email: Laura.Grigolon@econ.kuleuven.be. Nina Leheyda: ZEW Centre for European Economic Research. Email: leheyda@zew.de. Frank Verboven : University of Leuven and C.E.P.R. (London). Email: Frank.Verboven@econ.kuleuven.be.