Incentives matter: university file

Some European governments aim to promote their universities’ performance in international rankings by creating financial incentives. Recent research based on the situation in Italy, explains that such policies can backfire. You have to be careful about what measure is used as the indicator of performance.

Manuel F. Bagues, Mauro Sylos Labini and Natalia Zinovyeva explain in a column on VoxEU.org that

In March 2000 the European Council set in Lisbon the goal of making the EU the most competitive and dynamic knowledge-based economy in the world by 2010. Two years before that deadline, this goal seems as unattainable as ever for most European countries. This is most visible in the university sector. Indeed, with the notable exception of the UK, European universities display a poor performance in most international education rankings. ... The Italian universities are probably among the most worrying cases: graduates experience long non-employment spells after graduation and earn relatively low wages compared with their European equivalents.

They continue,

To cope with the above challenges, several European countries, including Italy, have recently reformed their university systems even though without giving up the governments’ (quasi) monopoly. In general, the reforms have given universities more autonomy and more powerful incentives. These incentives have often been implemented through “input funding” contingent on the number of students and “output funding” based on the number of diplomas granted (Jacobs & Van der Ploeg, 2005). As noted by these authors, some of these rules might undermine educational quality, as in most cases the quantity rather than the quality is rewarded due to the difficulties in measuring the later. Universities might potentially respond by lowering their standards as long as the reputation loss is not too severe. Yet, as Mas-Colell (2003) points out, “Europe has not yet developed muscular reputation effects. We are still, on the whole, dominated by a generic culture of credentialisation where what is important is to have a credential to exercise […] and it is much less significant who the issuer of his credential is.” (Emphasis added)

Recent research based on the Italian case shows that these concerns are warranted. Bagues, Sylos Labini and Zinovyeva (2008) show that by funding universities according to the number of students that pass their exams, which is of course endogenous, the Italian government is favouring those universities that add less value. It simply funds more those universities with lower standards.

Bagues, Sylos Labini and Zinovyeva note

Our findings raise concerns on the effectiveness of the funding mechanism. The evidence suggests that a financing scheme that was meant to reward universities that produce higher value added is, instead, favouring universities with lower standards. Policy makers should be very cautious about using students’ academic performance as a proxy for university value added when the universities are the ones measuring performance. In light of this evidence, quality ensuring mechanisms—e.g., a system based on external examiners, as in the UK—is a necessary complement to any output funding scheme of this type. And given that obtaining objective evaluations from external examiners might be itself problematic and costly, it is necessary to foster reputation effects in the market for higher education. For instance, by publicising data about how graduates of different universities and disciplines perform in the labour market.

This unfortunately is where you head if you think that education is everything and everyone must be educated. Under such a system education becomes meaningless. While everyone may have a "degree", no one is in fact educated. Standards have fallen to the lowest common denominator. All the talk of a "knowledge economy" and thus belief that there is a need for a more educated workforce can lead to everyone having a "degree" but no one in workforce actually having much of a useful education.

• Bagues, M., Sylos Labini, Mauro and Natalia Zinovyeva (2008), “Differential Grading Standards and University Funding: Evidence from Italy”, CESifo Economic Studies 54 (2), 149-176.
• Jacobs, B. and F. Van der Ploeg (2006), ‘‘Guide to Reform of Higher Education: A European Perspective’’, Economic Policy 21(47), 535–92.
• Mas-Colell, A. (2003), ‘‘The European Space of Higher Education: Incentive and Governance Issues’’, Rivista di Politica Economica 93, part 11/12, 9–27.