September 28, 2021, 11:00–12:30
Economic Theory Seminar
We develop a foundational model of the non-market allocation of resources through grantmaking. By casting the problem in a supply and demand framework in spite of the absence of prices, we characterize the equilibrium level of applications and acceptance standard. On the demand side, agents with higher types self select into applying. On the supply side, grants are awarded to applicants who are evaluated favorably according to noisy information available to the evaluation panel. In all stable equilibria resulting when funds are allocated across fields in proportion to applications—as well as under budget allocation rules in a general subproportional 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.