Who captures the state? Evidence from irregular awards in a public innovation grant program

Abstract Research summary This study utilizes the administrative data of an innovation grant program in a major emerging economy to study which firms are best positioned to capture the state and access resources beyond what their rule‐complying merits command. We trace the grant allocation process and directly observe occurrences of rule‐violating funding. We show that firms vary in capability to secure irregular awards, depending on factors such as geographic proximity and the social and bureaucratic setting within which entrepreneurs and officials interact. Furthermore, by comparing the actual allocation of irregular awards with the counterfactual scenario in which recipients were evaluated solely based on grant rules, we conclude that crony capitalism, rather than bureaucratic heroism, is the primary driver of irregular awards. Managerial summary Governments often use innovation grant programs to promote firm innovation, but these programs sometimes fail to achieve their objectives due to grant officials violating policy rules to provide resources to undeserving firms. We study a public funding program in a major emerging economy to analyze the bureaucratic structure and the social dynamics within which entrepreneurs and bureaucrats interact to identify the sources of state‐resource misallocation. We find that geographic distance, intragovernmental checks and balances, and the lack of direct social intermediary connecting entrepreneurs with bureaucrats help reduce the likelihood of collusion for state‐resource misallocation. Our results generate insights to help guide the (re)design of public funding programs, particularly in countries with low levels of transparency and public accountability.