No abstract

In order to make use of non-repayable state grants, firms need to possess internal funds, which we can refer to as internal funds for development. The value of these is equal to the funds accumulated over previous years; that is, the relatively broadly defined accumulated profit. The benefit of development projects implemented with grants is that they increase social value added; but without the appropriate incentives, firms have a tendency to simply boost their individual profitability. We can identify this as a moral hazard of the grants. This study examines how the extent of this moral hazard can be deduced based on quality parameters, and it explores the relationship between the size of a development project, the available internal funds and the paid-out grants. It analyses in detail the consequences of overfunding and underfunding, which can be identified in terms of their impacts on the social value added.

Lowering moral hazard is possible by proper incentives, therefore we examine the elements of the documentary request of the contract and the application of the state aid process. We conclude that the aim using administrative constraints is rather detecting fraud than fighting moral hazard issues. If the documentary requirement would aim treating moral hazard, it would shrink the number of companies eligible for tendering. Due to the second effect of documentary requirements lowering moral hazard is only possible if adequate quality measurers can be defined in form of an incentive for the tendering process and are rigorously controlled in the standstill phase of the development projects.