Competitive grants, grant-seeking and welfare when there is regional government failure

The paper addresses the welfare implications of competitive grants if government failure leads to inefficiencies in the production of regional public services. Competitive grants may improve welfare by setting incentives for regions to improve efficiency in order to acquire grants. 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-theoretical context is developed and simulations are performed to derive the optimal grant-distribution scheme. We found a mix of competitive and unconditional grants to be optimal in the vast majority of simulated scenarios. The optimal grant-distribution scheme depends on the characteristics of regions and on the welfare function used.