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Grants versus Financial Instruments: Which Offer Stronger Incentives to Aid Recipients?

Phedon Nicolaides

This article asks whether financial instruments provide stronger incentives to their recipients than grants. It finds that aid recipients in fact have a stronger incentive to work harder to make a grant-aided project successful. By contrast, aid-granting authorities should prefer financial instruments over grants because repayable public funding results in smaller outlays from public budgets. The article concludes that different forms of public support should be granted in different situations: grants for non-commercial projects, repayable advances for risky projects and financial instruments for projects which in principle are financially viable.

Professor at the College of Europe and at the University of Maastricht. I am grateful to Lars Wirbatz and an anonymous referee for comments on an earlier draft. I am solely responsible for the views expressed in this article.


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