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Conditional Grants, Grant-Seeking and Welfare when there is Government Failure on the Subordinate Level

  • Bischoff, Ivo

The paper addresses the welfare implications of conditional grants if government failure leads to inefficiencies in the production of regional public goods and services. Conditional grants may improve welfare by setting incentives for regions to improve efficiency. At the same time, resources are wasted in the process of grant-seeking. This paper provides a theoretical model to assess the net effect on welfare. A three-stage game-theoretic context is developed and simulations are performed to derive the optimal grant-distribution scheme. We found conditional grants to be welfare-enhancing in the vast majority of simulated scenarios under a classical utilitarian welfare function. Once distributional concerns are accounted for, the scope for conditional grants becomes limited.

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 08-031.

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Date of creation: 2008
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Handle: RePEc:zbw:zewdip:7303
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  9. Grossman, Philip J. & Mavros, Panayiotis & Wassmer, Robert W., 1999. "Public Sector Technical Inefficiency in Large U.S. Cities," Journal of Urban Economics, Elsevier, vol. 46(2), pages 278-299, September.
  10. Philip J. Grossman, 1996. "The distribution of Federal grants-in-aid: the increasing importance of PACS relative to state and local political parties," Monash Economics Working Papers archive-13, Monash University, Department of Economics.
  11. Guy Gilbert & Yvon Rocaboy, 2004. "The central government grant allocation problem in the presence of misrepresentation and cheating," Economics of Governance, Springer, vol. 5(2), pages 137-147, 07.
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