Performance-Related Funding of Universities: Does More Competition Lead to Grade Inflation?

23 Pages Posted: 13 Nov 2011

See all articles by Thomas K. Bauer

Thomas K. Bauer

Rhine-Westphalia Institute for Economic Research (RWI-Essen); University of Bochum - Faculty of Economics; IZA Institute of Labor Economics

Barbara S. Grave

Rhine-Westphalia Institute for Economic Research (RWI-Essen)

Abstract

German universities are regarded as being under-financed, inefficient, and performing below average if compared to universities in other European countries and the US. Starting in the 1990s, several German federal states implemented reforms to improve this situation. An important part of these reforms has been the introduction of indicator-based funding systems. These financing systems aimed at increasing the competition between universities by making their pubic funds dependent on their relative performance concerning different output measures, such as the share of students obtaining a degree or the amount of third party funds. This paper evaluates whether the indicator-based funding created unintended incentives, i.e. whether the reform caused grade inflation. Estimating mean as well as quantile treatment effects, we cannot support the hypothesis that increased competition between universities causes grade inflation.

Keywords: grade inflation, higher education funding, university competition

JEL Classification: H52, I21, I22

Suggested Citation

Bauer, Thomas K. and Grave, Barbara S., Performance-Related Funding of Universities: Does More Competition Lead to Grade Inflation?. IZA Discussion Paper No. 6073, Available at SSRN: https://ssrn.com/abstract=1958728

Thomas K. Bauer (Contact Author)

Rhine-Westphalia Institute for Economic Research (RWI-Essen) ( email )

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Essen, 45128
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University of Bochum - Faculty of Economics ( email )

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IZA Institute of Labor Economics ( email )

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+49 228 38 94 529 (Phone)
+49 228 38 94 510 (Fax)

Barbara S. Grave

Rhine-Westphalia Institute for Economic Research (RWI-Essen) ( email )

Hohenzollernstr. 1-3
Essen, 45128
Germany

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