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

48 Pages Posted: 4 Aug 2008 Last revised: 18 May 2009

Date Written: 2008

Abstract

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.

Keywords: conditional grants, government failure, rent-seeking, normative public finance

JEL Classification: D7, H77, H5, H11

Suggested Citation

Bischoff, Ivo, Conditional Grants, Grant-Seeking and Welfare when There is Government Failure on the Subordinate Level (2008). ZEW - Centre for European Economic Research Discussion Paper No. 08-031, Available at SSRN: https://ssrn.com/abstract=1200642 or http://dx.doi.org/10.2139/ssrn.1200642

Ivo Bischoff (Contact Author)

University of Kassel ( email )

Fachbereich 07
Nora-Platiel-Straße 4-6
34109 Kassel, 34109
Germany

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