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In this section we present models that show how much the subsidy rules set by the donor [state] can constitute economically irrational exclusion of its optimum. We will analyse and discuss the following rules for receiving subsidies:

• the donor (state) prohibits carry-over of the subsidy from one budget period to another,

• the state prescribes a maximum ratio for the provider's overhead costs in relation to the subsidy provided.

Although there may be good reasons for such restrictions (e.g. compliance with budget regulations), we should point out that they are not without their costs. Again, there is a trade-off: the subsidy provider enforces its will (as expressed by the rules) at the cost of lower spending efficiency. Such restrictions can therefore be counterproductive, acting against the primary intentions of the donor. We are talking here about real phenomena, not just model-based speculation.

The ban on the carry-over of unused parts of the subsidy leads to waste at the end of the year. This is usually caused by unforeseen problems with drawing the subsidy, due, among other things, to the impossibility of precisely estimating needs and prices in advance and of perfectly meeting deadlines in the relatively distant future.

Moreover, strict rules limiting the free will of the recipient regarding the allocation of the subsidy among individual material items (overheads, wages, investment) in fact represents a threat of limited efficiency of the subsidy. There is again a trade-off: on the one hand the state (donor) enforces its will in the rules of use of the subsidy and tries to avoid the threat of misuse of the subsidy; on the other hand it "pays” for this in terms of reduced efficiency of the subsidy, as some public goods providers, for example, will go out of business, taking their knowledge and skills (acquired partly thanks to previous subsidies) with them. Limiting wage funds to a fraction of the total amount of a scientific grant, for instance, can cause a brain drain of young researchers, especially in scientific fields where human resources are the biggest bottleneck.

The decision of the donor (state) can therefore (economically irrationally) contain a contradiction between its behaviour and its criterion (the purpose of its donor activity).

The first of the following two models will allowus to evaluate the impact of an obligation to use up the funds provided in a given fiscal period. The second model quantifies the results of a ban on using public funds in a non-prescribed way.

In both models we assume that the donor financially supports the social public service provider with the aim of maximizing its probability of survival.

For simplicity, we also assume that the provider is wholly dependent on the contribution (subsidy, grant) provided by the donor (e.g. the state).

We assume that the subsidy provider endeavours in “Darwinian” fashion to maximize the Pareto probability of its own survival.[1] Agents that behave in contradiction to this criterion will simply not survive, and the ambition of the model is to describe the behaviour of economic survivors.

Suppose that the survival of subsidy recipients (social service providers) depends exclusively on their income and that the subsidy is their only revenue. Extinction (non-survival) of a recipient is given by its inability to per for m the social service in question.

In this section we assume that the behaviour of an agent is determined not by the relative margin itself, but by the increase/decrease therein. This is consistent with the psychological Weber-Fechner law,[2] according to which individuals in many cases decide not according to the intensity of a stimulus, but according to the change in the intensity of the stimulus. This assumption is consistent with a second-order Pareto probability distribution, for which the risk of extinction decreases in proportion to the square of the distance from the extinction zone.[3] This is presented in more detail in section 1.3.2.

The reason why, unlike in previous chapters, we do not use the first-order Pareto distribution is that we are dealing here in fact with the criterion of a politician who always maximizes his probability of political survival in office and who knows from experience that voters put greater weight on the rate of growth of their standard of living than on the absolute level thereof.

  • [1] As we argued earlier (in the introduction and in section 5.1], all agents must implicitly respect this criterion in their decision-making, even if they have a different explicit (subjective] criterion.
  • [2] For more on the Weber-Fechner law, see section 1.3.2.
  • [3] Whereas for the first-order Pareto distribution the risk of extinction decreases in proportion to the distance from the extinction zone.
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