In federal systems, the relationship between central governments and constituent states increasingly hinges on intergovernmental grants-in-aid. Central governments are progressively leveraging conditional grants to advance supra-regional interests, necessitating co-financing by recipient states. This paper examines the impact of such arrangements through an analysis of the multi-billion Euro Higher Education Pact (“Hochschulpakt”) in Germany, which aims to bolster higher education. The study explores the efficacy of central government efforts in achieving broader societal objectives. Our findings highlight several design flaws within the program and empirically demonstrate the emergence of unintended consequences. This research also enhances the understanding of state behavior in response to federal funding initiatives.
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