17/06/2024

Javier Viviens

European University Institute 

How (not) to incentivize university students’ performance  

Abstract

Merit-based financial aid is often used as a tool to improve university students' performance, although there is mixed evidence about its effectiveness. In this paper, I explain why such policies may fail. While rewarding good performance, these policies also decrease the implicit cost of education. This creates an income effect that counteracts the positive incentive effects of the policy. To evaluate the empirical validity of this novel theoretical framework, I use a meritocratic reform of tuition fees at some Spanish universities as a natural experiment. This policy aimed to increase students' performance by providing tuition fee discounts in the following year of study. These discounts depended on students' performance, such that the better the performance, the larger the discount. I show that the implementation of the policy led to a decrease in performance in treated universities. I demonstrate that this effect is not due to students reacting optimally to the policy rather than a change in the composition of the pool of students. Finally, consistent with the theoretical framework, I observe that students with low socioeconomic status react the most strongly to the policy, indicating that the income effect is more pronounced for poorer students. 

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