You cannot make a blanket statement that one approach is better than the other. It really depends on the population characteristics of the state and demographics of in-state students.
Some examples:
1 - Illinois and Pennsylvania are states with large concentrations of wealth and large populations of high stats kids. UIUC and PSU can easily get a core of high stat students without having to offer merit, so they don’t.
2 - States like Arizona, Oklahoma and Alabama are relatively poor with weak public school systems that do not produce many strong high school graduates. These states have aggressive OOS merit aid because without this aid, it would be difficult to get enough qualified kids to fill out their professional schools.
3 - In some states without a clear flagship, schools will compete with merit to try to out-recruit their competition. Not wanting to be #2 to an in-state rival is one of the reasons why schools like Alabama/Auburn and Arizona/ASU offer such strong merit.
Kentucky probably fits in with plains states like Nebraska, Colorado, Kansas, etc. that offer some OOS merit but are not as aggressive as some others.