Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/24726
Authors: 
Bischoff, Ivo
Year of Publication: 
2008
Series/Report no.: 
ZEW Discussion Papers 08-031
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.
Subjects: 
conditional grants
government failure
rent-seeking
normative public finance
JEL: 
H77
H5
H11
D7
Document Type: 
Working Paper

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