Higher Education Reform: Getting the Incentives Right CPB Netherlands Bureau for Economic Policy Analysis CHEPS Van Stolkweg 14 University of Twente P.O. Box 80510 P.O. Box 217 2508 GM The Hague, The Netherlands 7500 AE Enschede, the Netherlands ISBN 90 5833 065 6 2 Contents Contents Preface 9 Introduction 11 1 The Dutch higher education system 15 1.1 Binary system 15 1.2 Formal tasks 16 1.3Types of institutions 16 1.4 Funding structure 17 1.5 Public expenditures on higher education 19 1.6 Tuition fee policies 21 1.7 Student support system 23 1.8 Admission policies 24 1.9 Quality control 25 1.10 Enrollment 26 Annex:Public funding of higher education in the Netherlands, performance-based models 29 2 Economics of higher education 35 2.1 Why do people attend higher education? 35 2.1.1 The human capital approach 35 2.1.2 The signalling approach 36 2.1.3How high are the financial and non-financial returns to higher education? 36 2.2 Why public support of higher education? 38 2.2.1 Human capital spillovers 38 2.2.2 Capital market constraints 39 2.2.3Risk 40 2.2.4 Imperfect information and transparency 41 2.2.5 Income redistribution 42 2.2.6 Tax distortions 42 2.3How to fund higher education? 42 2.3.1 Student support 43 2.3.2 Funding of higher education institutions 43 2.4 Public versus private provision of higher education 44 2.5 Should the higher education sector be deregulated? 45 2.6 Why combine education and research in universities? 46 5 Higher Education Reform: Getting the Incentives Right 2.7 Why and when should research be publicly funded? 47 2.8 How to organise public funding of research? 49 2.9 Incentives and inefficiencies in the public sector 50 3Tuition fees and accessibility: the Australian HECS 53 3.1 Background 53 3.2 Private contributions and economic theory 54 3.2.1 Why private contributions? 54 3.2.2 The impact of tuition fees 55 3.3 The Higher Education Contribution Scheme in Australia 57 3.3.1 History and rationale 57 3.3.2 The Higher Education Contribution Scheme 58 3.4 Evaluation of the HECS 61 4 Deregulation of higher education: tuition fee differentiation and selectivity in the US 67 4.1 Background 67 4.2 Deregulation and economic theory 68 4.2.1 Tuition fee deregulation 68 4.2.2 Impediments to competition 69 4.2.3Student selection 71 4.2.4 Problems with student selection 71 4.2.5 Relationship between tuition fee and admission policies 72 4.3Deregulation in international perspective 73 4.4 Tuition fee and admission policies in the US 75 4.4.1 Tuition fee policies 75 4.4.2 Admission policies 80 4.5 Evaluation 82 5 Public funding of higher education: the Danish taximeter-model 85 5.1 Background 85 5.2 Funding models and economic theory 86 5.2.1 Output-based funding 86 5.2.2 Vouchers 87 5.3The taximeter-model of Denmark 88 5.3.1 The reforms of 1992 88 5.3.2 The taximeter-principle 89 5.3.3 Safeguarding the quality of higher education 91 6 Contents 5.4 Evaluation of the taximeter-model 93 5.4.1 Danish evaluation studies 93 5.4.2 Student performance 94 5.4.3Budgetary effects 96 5.4.4 Quality once again 96 5.4.5 Competition 97 5.4.6 Other issues 98 6 Public funding of academic research: the Research Assessment Exercise of the UK 101 6.1 Background 101 6.2 Research funding and economic theory 101 6.2.1 Pros and cons of output-based funding 101 6.2.2 Research output and pitfalls in popular output measures 104 6.2.3Research funding and the relation with research assessments: international differences 106 6.3The Research Assessment Exercises in the UK 106 6.3.1 RAE-based funding and overall funding within the HEFCE 107 6.3.2 The Research Assessment Exercise of 1996 108 6.3.3 From RAE-ratings toward allocation of funds 109 6.3.4 Changes in RAE through time and plans for the RAE of 2001 110 6.4 Evaluation of the RAE 113 6.4.1 Research output 114 6.4.2 Funding bias against new researchers 116 6.4.3Bias toward short-term research 116 6.4.4 Adverse incentives for teaching and knowledge transfer 116 6.4.5 Academic transfer market 117 6.4.6 In conclusion 117 7 When factory meets faculty: university-industry co-operation in the US 119 7.1 Background 119 7.2 University-industry ties and the role for government 119 7.2.1 The increasing importance of university-industry ties 119 7.2.2 Benefits and costs of university-industry interaction 123 7.2.3What role for government? 125 7.3University-industry collaboration in the US 126 7.4 Evaluation of American linkage policies 129 7.4.1 Academic patenting 129 7.4.2 Co-operative research centers 131 7 Higher Education Reform: Getting the Incentives Right 8 The Dutch higher education system: options for policymakers 135 8.1 Tuition fees 135 8.1.1 Public versus private contributions 135 8.1.2 Deregulation of tuition fees 138 8.2 Admission 139 8.3Public funding of teaching 140 8.4 Public funding of research 142 8.5 Public-private cooperation 145 8.6 Incentives in higher education; some final words 147 References 149 8 Preface Preface This book is a joint product of the Netherlands Bureau for Economic Policy Analysis (CPB) and the Center for Higher Education Policy Studies (CHEPS). From the CPB, Erik Canton and Richard Venniker (both from the Knowledge Economics Unit) participated, and from CHEPS Ben Jongbloed, Jos Koelman, Peter van der Meer and Hans Vossensteyn joined the team. To acknowledge the individual efforts, the names of the authors are mentioned at the beginning of each chapter. A number of other people have given constructive input to this project. Representatives of a number of organisations participated in an advisory committee. From the Ministry of Education, Culture and Science Drs. R. Kleingeld, Drs. W. van Niekerk, Drs. R. Ulrich, and Drs. G. van der Vliet joined the committee; from the Ministry of Agriculture, Nature Management and Fisheries Drs. R. Brockhoff; from the Ministry of Economic Affairs Drs. R. Duvekot; from the Ministry of Finance Drs. D. Kabel, Drs. O. Merk, and Drs. P. Reuter; Prof. dr. L. Meijdam from Tilburg University; Dr. G. de Jager from the HBO-raad, Netherlands Association of Universities of Professional Education; and from the VSNU, Association of Universities in the Netherlands Drs. E. de Munck, Dr. C. Otten and Drs. B. Wiersema. Helpful comments from the members of the advisory committee are deeply appreciated. The project has also greatly benefited from many valuable comments of Marc Pomp, George Gelauff, Wolter Hassink, Bas Jacobs, Dinand Webbink, and participants of the 56th congress of the International Institute of Public Finance, and in particular the discussant Theo Georgakopoulos. Wout de Bruin and Adri den Ouden helped to collect the data. Kathy Schuitemaker and Arnold Verkade handled the lay-out. In June 2000, Erik Canton and Peter van der Meer visited the University of Aarhus, the University of Copenhagen, the Danish Evaluation Institute, the Ministry of Education, and the Copenhagen Business School to talk about the Danish higher education system in general, and the taximeter-model in particular. Thanks go to Kirsten Skjødt (University of Aarhus), Peter Erling Nielsen (University of Copenhagen), Dort Kristoffersen (Danish Evaluation Institute), Jesper Wittrup and Jesper Rasmussen (Ministry of Education), and Anette Juhl Hansen and Hendrik Holt Larsen (Copenhagen Business School) for their hospitality and kind help. F.J.H. Don Director, CPB 9 Higher Education Reform: Getting the Incentives Right 10 Introduction Introduction The higher education sector is generally considered to be an important contributor to economic prosperity. Higher education brings forth human capital and knowledge, which are indispensable ingredients for the process of economic growth (cf. Barro and Sala-i-Martin, 1995; Romer, 2001). Modern societies have an urgent need for highly skilled labour, not only to push ahead the technological frontier by creative researchers but also to adopt and diffuse existing knowledge. While this crucial role of higher education for economic growth is widely recognised, the way in which countries organise their higher education system differs vastly. Traditionally, the higher education sector is strongly intertwined with the public sector through an extensive system of regulation and financial support (direct and indirect). Apart from this very general common feature, countries differ in policies with respect to student selection, tuition fees, student support programs, public funding of teaching and research, and so forth. This country- specific nature of higher education reflects the fact that the university system is often deeply embedded into a nation’s history and culture. Only recently some countries have begun to revisit the role of government. This development was spurred by the tightening of fiscal constraints on public outlays in most OECD countries, which forced governments to rethink their task in (virtually) all sectors they are involved in. The Netherlands forms no exception. There is an ongoing debate on the function of higher education in the society at large, and the role of the various stakeholders in the higher education sector, including the government, the higher education institutions, students and the private sector. The current debates in the Netherlands concern a wide range of issues. • First of all, within the perspective of the “knowledge economy” it is claimed that there is a sheer need for highly skilled graduates who are employable in a broad spectrum of jobs.