It's comparatively better than the market – private actors also rely on distorted incentives

Third, some doubt whether peer review is accurate: is it good at sorting out good ideas and grant applications from bad ones? The answer to this seems to be a cautious and qualified "yes." Figuring out whether peer review accurately identifies projects most likely to succeed is challenging; basic research, in particular, is typically likely to fail, and paradigm-changing research is perhaps the most likely to fail, almost by definition. 166 Evidence suggests that peer review can probably discriminate sound applications from seriously flawed applications. 167 However, beyond that distinction, scholars debate whether better-scored grants are actually more productive. 168

[*32] Overall, deep peer involvement, whether in the process of seeking applications and therefore identifying areas of innovation (broad or narrow) or in the process of choosing projects and individuals to fund, casts a substantially different light on the grant-funding process. Peer involvement in picking projects has its flaws; it might involve bias, it might suggest safe science, and it is certainly imperfect at identifying the best projects for funding. Similarly, the process of identifying areas of potential innovation, which relies both on peer involvement and on targeting by agency or other government actors with an eye toward social welfare priorities (or patronage, or pork), has its own flaws and idiosyncrasies. But of course, so does the principal alternative - a market-based system that relies on the incentives of private actors to decide what innovation is best to pursue, not based on evaluations of scientific merit or social welfare value, but on a calculus of what profits are appropriable through an imperfect intellectual property system or otherwise. 169 Grants aren't perfect; they're just different, and more interestingly different than is often assumed.