Incentives in Higher Education : Potential Effects of Alternative Formula-Funding Models

In many countries, governments abandoned negotiated methods for allocating public resources among universities, moving towards the adoption of formula-funding models. From a policy perspective, a relevant issue is to correctly design such formulas, to stimulate universities in pursuing better results. The aim of this paper is to analyze the potential effects of different formula-based models on universities' behaviours. For this purpose, a theoretical framework is proposed, through which some hypotheses are derived. Specifically, main results show that if the formula is designed as a fixed transfer, proportional to output levels, then each university tends to specialize towards the more "remunerative" activity, that is the activity for which it is able to attract more external resources. Then, an empirical simulation is presented for testing this result. Then, a situation where universities strategically interact is presented. The results of this hypotheses show that universities tend to lessen their quantities of outputs, suggesting that more competition will led to less final products (teaching and research) - if it not accompanied by more resources. In the last section, policy implications from all results are discussed