How Does Competitive Funding Affect the Productivity of Universities?

How can competitive funding affect productivity?

Competitive funding can affect productivity through three channels: the administration effect, the competition effect and the sorting effect. The administration effect arises because competitive funding requires universities to invest time and money in reporting how the funding has been used and what outputs have been produced. Since these costs arise for all universities alike, the administration effect decreases the productivity of all universities. Hence, this decreases the productivity of the most productive universities but has no effect on the distance of peers to the most productive university since it reduces the productivity of the less productive peers as well.

The competition effect represents the general justification for introducing competitive funding. It argues that competition for funding limits the ability of universities to pursue their own goal, forcing them to become more productive. Hence, the competition effect increases productivity of all universities. However, assuming that the most productive universities face substantial competition from their international peers, independent of the funding mode, suggests that the competition effect is particularly strong for the less productive universities, forcing them to catch up and reduce the distance to the most productive universities.

Finally, the sorting effect arises because competitive funding intensifies sorting of good students and staff into the most productive universities. Since teaching good students might be easier and because good staff is more productive, the best universities become more productive. Simultaneously, however, the decrease in student and staff quality increases the distance of peers to the most productive university.

Table T 2 summarises these arguments by showing how the administration, competition and sorting effect impact the productivity of the most productive universities and their distance to less productive peers. Since the relevance of these three channels remains unknown, the total effect can take either direction. However, differentiating between the effect on the most productive university and its peers allows researchers to discern the relative strength of the three channels.

Which data are used?

The study uses data from universities in eight European countries between 1994 and 2006. The simple production function assumes that professors, other research staff and administrative staff work together in teaching students and publishing research publications.

What do the results show?

The results suggest that international public funds decrease the productivity of the best performing universities, which suggests a non-negligible effect because of the administrative burden induced by competitive funding. This highlights the relevance of optimising the administrative process of competitive funding in a way that reduces these costs. However, competition for international public funds also disciplines universities, as evidenced by a decrease in the distance of peers to the most productive university. Conversely, tuition fees enhance the productivity of the best performing universities, but increase the distance to universities with lower productivity, which suggests a strong sorting effect. This highlights the relevance of accompanying tuition fees with scholarships to offset unintended consequences in terms of equity. Finally, the study finds no impact of private funding on the productivity of teaching and research publications, though it might affect the productivity of technology transfer that is not analysed in the study.