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The government uses grants and cooperative agreements as a means of assisting researchers in developing research for the public good, whereas it uses contracts as a means of procuring a service for the benefit of the government. Grants are much more flexible than contracts.
Categorical grants are the most common type of grants given by the federal government to state and local governments, but they are not the only type of grants. There also exist block grants, which are grants given by the federal government directly to local governments with few strings attached.