The financial benefits and burdens of performance funding:
Hagood, Lori Prince
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Over the last decade, policymakers have revisited performance funding as a means to address issues of accountability and productivity in American higher education. By tying state appropriations directly to institutional outcomes, performance funding provides financial incentives intended to inspire changes in institutional behavior and lead to improved outcomes. However, very little of the performance funding literature addresses the actual restructuring of state funds as a result of these incentives (Kelchen & Stedrak, 2016; Rabovsky, 2012). Moreover, the primary arguments in favor of and in opposition to performance funding are rooted in potential financial outcomes that remain untested. As such, the impact of performance funding policies on state spending and institutional resources merits further attention. Guided by principal-agent theory and the theory of social construction and policy design, this study examines how performance funding policies restructure state funding for higher education. Using a differences-in-differences research design, I explore changes in state-level spending and institution-level resources associated with performance funding implementation. Furthermore, through an extensive data collection effort, this study distinguishes between nine different types of performance funding policies, and incorporates the amount of funding tied to performance outcomes. Finally, this dissertation research explores the effect heterogeneity of performance funding across institution types, investigating which institutions benefit or not from these incentive policies. Findings suggest that performance funding has little effect on the total state spending on higher education, but notably impacts how state appropriations are distributed to institutions. Indeed, high-resource institutions are more likely to benefit directly from performance funding while for low-resource institutions funds are more likely to decline. Moreover, findings also suggest that these results are not accompanied by similar changes in bachelor’s degree production. That is, the institutions most likely to receive funding increases are no more likely to increase the number of bachelor’s degrees conferred following performance funding implementation. This dissertation research fills three notable gaps in the existing literature: (1) it expands knowledge regarding how performance funding restructures state funding; (2) it systematically incorporates policy design elements overlooked by the existing scholarship; and (3) it examines how the effects of performance funding vary across institution types.