Working Paper: CEPR ID: DP15389
Authors: Marco Ottaviani
Abstract: The paper develops a foundational model of the decentralized allocation of subsidies through competitive grantmaking. Casting the problem in a simple supply and demand framework, we characterize the level of applications and acceptance standard that result in equilibrium. The equilibrium success rate (grants over applications) decreases in the budget, consistent with some recent evidence, if and only if the distribution of types has decreasing hazard rate. In all stable equilibria resulting when funds are allocated across fields proportionally to applications--as well as under apportionment rules in a general class characterized in the paper--an increase in noise in the evaluation in a field perversely raises applications in that field and reduces applications in all the other fields. We characterize how the design of allocation rules can be modified to improve welfare.
Keywords: grants; applications; grading on a curve; evaluation across fields; formulabased allocation; proportional allocation; payline; unraveling; signal noise
JEL Codes: D83; H81
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in budget allocation (H61) | decrease in equilibrium success rate of grants over applications (C62) |
| increase in evaluation noise (C52) | increase in applications in the field experiencing noise (R41) |
| increase in evaluation noise (C52) | decrease in applications in other fields (K39) |