Author(s): Marco Ottaviani
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 equilibrium acceptance standard and applications. 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, formula-based allocation, proportional allocation, payline, unraveling, signal noise
JEL codes: D83, H81