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A fundamental criterion of the compatibility of State aid with the internal market is the presence of incentive effect. State aid must be able to change the behaviour of the recipient undertakings. The purpose of this article is threefold. First, it reviews recent case law and Commission decisions on the presence or absence of incentive effect. Second, it argues that this simple, yet fundamental criterion of compatibility suffers from a serious weakness. Third, it proposes an alternative method for establishing the existence of an incentive effect. Even when the aid is granted before the start of work, it does not necessarily follow that it induces the recipient to do something extra. A savvy company that knows how State aid rules work can adjust its investment plans in such a way as to qualify for aid, even when it does not really need it. Therefore, the new approach proposed in this article goes beyond the current test of the existence of incentive effect, asking not just whether a specific investment or project would not be carried out without the aid, but also whether the project is ‘discretionary’, in the sense that it is not indispensable for the continued operation of the recipient company.  Keywords: incentive effect; necessity of State aid; indispensable expenditure; discretionary expenditure

Incentive Effect of State Aid: Necessity and Counterfactual