No. 3/2021 Government funding incentives and study program capacities in public universities: theory and evidence

Abstract

Objectives aimed at increasing higher education productivity have stimulated use of performance-based funding (PBF) of higher education institutions both in Europe and the US. On theoretical grounds PBF is expected to speed-up study program capacity adjustments. We find from Norwegian data that study program capacities are adjusted favorably to productivity only if there is competition for students. Strengthened PBF does not affect the adjustments. Instead, admissions seem to adjust to secure full enrollment. The results provide an explanation of why very few positive effects of PBF in higher education are found in the literature. Given continued use of PBF to enhance productivity, a likely policy implication is to pay more attention to the overall allocation of study places to higher education institutions.