Countering Moral Hazard in Higher Education: The Role of Performance Incentives in Need-Based Grants*

Abstract

Using a unique reform in the Spanish financial aid program, I estimate the impact of need-based grants on student achievement and dropout decisions under different intensities of academic requirements. Utilizing comprehensive administrative data from a large university, I exploit sharp discontinuities in the grant eligibility formula to identify the effect of aid on student outcomes. I find that aid eligibility has no effect on student outcomes when the academic requirements are comparable with most existing national grant schemes worldwide. In contrast, I find that need-based grants have strong positive impacts on student performance and degree completion when they are combined with more demanding academic requirements.

The Effects of Financial Aid on Graduation and Labor Market Outcomes: New Evidence from Matched Education-Labor Data

“…The authors find that those students, who may potentially pay a higher fee for an additional extra year of education, have higher incentives to finish on-time. The results are also in line with the literature showing that financial aid programs work through incentives on academic achievement, and not simply through the relaxation of the budget constraints(Montalbán, 2019;Scott- Clayton, 2011). In particular, since the RTS financial aid sets a minimum number of credits which, at the first year, is equal to 41%-50% of the total load, subsidized students target these requirements and under-perform with respect to those having a higher cost of college.…”

“…3 The recent paper by Agasisti et al (2021) also disentangles the effects induced by a change in the merit requirements in a need-based program in the Italian context, findings similar results to Montalbán (2019) on medium-and high-ability students. However, besides focusing only on a change in the requirements (and not in 2 these government inputs.…”

“…One exception is Montalbán (2019), who uses a reform of the Spanish financial aid system to isolate the effect induced by a change in the minimum academic requirements from the total effect of financial aid on the performance of students during college; however, this study does not provide any evidence on the effect of the reform on the labor market outcomes of the recipients. 3 Therefore, relatively little is known about the long-run return on investments for 1 Examples of financial aid grants based on students' parental income are the "Maintenance Grant" in the UK, the "Becas" grant in Spain, the "Pell Grant" in the US, the "Bourses sur critéres sociaux" in France, and the "Right to Study" program in Italy.…”

“…This matching procedure, linking the survey data to the administrative records, is based on clusters of students identified by several individual characteristics: year of enrollment, age, gender, degree (bachelor or master), numeric code of their graduating major, numeric code of their graduating campus, and high school final grade. 29 First, the administrative records on the financial aid recipients are restricted to bachelor's degree graduates only since information on high school final grades is not available in the "AlmaLaurea" repository for master degree graduates. 30 Moreover, the administrative records are restricted to financial aid recipients lying close to the third threshold to avoid matching students offered with different incentives and to clusters containing no more than one individual, as in Britto 29 There are two years of enrollment observed, 2009 and 2010, 88 majors, 8 campuses, 41 possible values of the high-school final grade, and age ranges from a minimum of 17 to a maximum of 67.…”

“…29 First, the administrative records on the financial aid recipients are restricted to bachelor's degree graduates only since information on high school final grades is not available in the "AlmaLaurea" repository for master degree graduates. 30 Moreover, the administrative records are restricted to financial aid recipients lying close to the third threshold to avoid matching students offered with different incentives and to clusters containing no more than one individual, as in Britto 29 There are two years of enrollment observed, 2009 and 2010, 88 majors, 8 campuses, 41 possible values of the high-school final grade, and age ranges from a minimum of 17 to a maximum of 67.…”