A Model of Grants Distribution: A Screening Approach

In this paper we develop a formal model of the optimal financing of research projects, when the projects differ in both their success probability and the cost of undertaking. We show that in the benchmark case of publicly observable costs the first best can be achieved. If the costs are private information, however, the optimal contract will imply some inefficiency. We provide the first order characterization of the optimal financing scheme in this case and explicitly find it, assuming CARA utility for the institutions