When Intuition Misfires: The Puzzle of Performance-Based Funding in Higher Education by Elizabeth Bell

The number of students who enroll in college and take on debt without receiving a college degree is striking. Of all students enrolled at public four-year universities, less than 60 percent will graduate with a degree within six years. For students enrolled at two-year colleges, the likelihood of graduation is even worse, with only about 30 percent of students graduating with a credential within three years (National Center for Education Statistics 2015). To put this in perspective, this means that over the past 20 years, more than 30 million students have enrolled in college and dropped out without receiving a degree or certificate (Shapiro et al. 2014).

If you were to ask many state policymakers about this problem, they would likely say that it’s a legacy of colleges and universities historically being funded based on how many students they enroll. As a result, state policymakers have argued that while colleges and universities are rewarded for enrolling more students, they have no incentive to increase the number of students graduating. This argument has laid the foundation for performance-based funding policies in higher education, in which universities are funded based on how many students they graduate instead of, or in addition to, how many students they enroll. These policies have become ubiquitous in higher education with more than 30 states adopting some form of performance-based funding.

However, despite the intuitive causal logic of performance-based funding policies, they simply do not work in practice. In fact, after gathering all of the published, peer-reviewed research on the topic and combining it into one model, my colleagues and I have demonstrated that performance-based funding has, on average, zero impact on the number of students making it to graduation (Bell et al. forthcoming). To be clear, our findings do not indicate that every performance-based funding policy fails, but that the average performance-based funding policy has no impact on the number of students making it to graduation. So why does such an intuitive and well-intentioned policy so clearly fail to help students get to graduation?

In answering this question, I address three areas where the underlying causal logic of these policies fail to align with reality. First, universities are not, as policymakers assume, only beholden to state lawmakers for funding. Second, universities are not, as policymakers assume, equal in their capacity to improve graduation rates. Third, financial incentives may not, as policymakers assume, be enough to impact complex outcomes like graduation and may lead to unintended consequences for equity and public service missions. Together, these unrealistic assumptions work to undermine the effectiveness of performance-based funding policies in higher education. I expand on each of these points in the sections below.

I. Competing Stakeholders

In order for changes in funding of colleges and universities to shift the priorities of university administrators, state legislative bodies would have to be the most important source of political control. However, this does not reflect current realities in higher education. If we want to generate meaningful change in graduation rates, first we have to recognize that universities have multiple competing stakeholders ranging from donors and state regents to accreditation agencies and state political leaders, all of which can introduce competing pressures. For instance, while accreditation agencies and donors may want the university to prioritize increasing access for historically underrepresented groups (low-income, minority, first-generation students), this may be overshadowed by state leaders incentivizing graduation rates that encourage universities to restrict admissions standards for disadvantaged, higher need students (Umbricht et al. 2015). Yet, in situations where the priorities of state legislature are in direct contrast to the mission and priorities of donors, accreditation agencies, and state higher education governance structures, it is unlikely that universities will change their behavior to meet one of many stakeholders.

In addition, most public universities no longer rely mainly on state appropriations for revenue; in fact, state funding makes up an increasingly insignificant portion of public college and university revenue streams (State Higher Education Executive Officers 2016). As of 2013, less than a quarter of university revenue streams came from state funding (Woodhouse 2015). In more extreme cases like the University of Oklahoma, only 12 percent of the university’s budget comes from state appropriations while 53 percent comes from philanthropic donations and other sources and the remaining 35 percent comes from tuition and fees. Thus, in these cases it might be possible for university presidents to simply make up the funding difference for not meeting completion goals through fundraising and tuition increases without having to change any institutional priorities and policy.

To be clear, our findings do not indicate that every performance-based funding policy fails, but that the average performance-based funding policy has no impact on the number of students making it to graduation.

II. All Colleges & Universities Are Not Created Equal

Performance-based funding policies also presume that all colleges and universities are equal. This does not reflect the reality of our current higher education landscape. Research has shown that the capacity and student populations at community colleges is vastly different from well-resourced research universities; in fact, many public two-year colleges are already underfunded and serve predominantly disadvantaged students. This means that some colleges may be able to provide expanded student support while others may not be able to afford costly graduation-boosting initiatives (Dougherty and Reddy 2013). Therefore, if the goal is to increase the quality of educational services, slashing appropriations to struggling institutions could make the situation even worse by making the already worst resourced institutions more pressed for financial support.

III. Limitations of Financial Incentives

The logic of performance-based funding neglects the limitations of relying on financial incentives for increasing accountability in public organizations. The scholarly community in many fields of social policy has researched and documented the flaws in utilizing financial incentives as a tool for increasing socially desired outcomes, such as college graduation rates. For instance, scholars researching performance funding in social services, health care, and K-12 education suggest that these policies are not feasible when the outcome involves complex indicators outside the administrator’s control (Gerrish 2015). In addition, scholars posit that there is a possible crowding-out effect that results from targeting extrinsic as opposed to intrinsic motivation; essentially by making organizations more concerned with one aspect of performance, more nuanced outcomes involving equity are often ignored (Heinrich 2002). In the context of performance-based funding in higher education, this means that as universities focus on increasing graduation rates as a whole they may lose sight of commitments to improve diversity and equity, which likely results in restricted access and success for historically underrepresented groups (Umbricht et al. 2015).

These crowding-out effects are also present in previous attempts to improve the quality of health-care and K-12 education through performance-based funding. For example, when hospitals have implemented performance-based funding models, health outcomes for patients did not improve (Bevan and Hood 2006). Instead, surgeons and physicians became more likely to avoid the highest need patients and had higher rates of misdiagnosis. Also, in K-12 education, when policymakers tied funding for teachers to standardized testing outcomes, teachers became more likely to focus on teaching to the test instead of prioritizing learning outcomes like critical thinking (Jacob 2002). Both of these examples highlight the limitations of financial incentives in improving complex outcomes such as health and education and the potential unintended consequences for equity.

Now let’s return to the case of higher education and graduation rates. Obtaining a bachelor’s degree is certainly not a simple process determined solely by the actions and priorities of college administrators. Instead, making it to graduation involves a complex process shaped by the finances of parents, student preparedness, engagement and sense of belonging on campus, as well as college wide financial constraints that administrators might have limited influence on (Pascarella and Terenzini 2005). As a result, pay for performance can only do so much to influence the ability of students to make it to graduation. Furthermore, by altering university incentives to enhance extrinsic motivation through state dollars, there could be a crowding-out effect on intrinsic motivation that is associated with public service missions. In fact, these insights directly map onto the observed negative impacts of some performance-based funding policies on access for underrepresented groups as a result of increases in admissions standards (Umbricht et al. 2015; Bell et al. forthcoming).

Taken together, these practical challenges make improving graduation rates much more complicated than performance-based funding policies presume. Moving forward, instead of relying on intuition, policymakers should carefully consider the complex context that shapes the success or failure of well-intentioned policies aimed at improving graduation rates in public colleges.


Elizabeth Bell is a PhD Candidate in the Department of Political Science at the University of Oklahoma. Her sub-field specializations include education policy and public administration as well as research methodology. Her research focusses on the effectiveness and politics of policies designed to improve college access, affordability and accountability. Her current research agenda centers on the politics of tuition-free community college policies as well as performance-based funding in higher education.



Bell, Elizabeth, Alisa Fryar, Nick Hillman, and David Tandberg. Forthcoming. “When Intuition Misfires: A Meta-analysis of Performance-Based Funding.” in Research Handbook on Quality, Performance and Accountability in Higher Education, E. Hazelkorn, A. McCormick, and H. Coates. Northampton, MA: Edward Elgar Publishing.

Dougherty, Kevin, and Vikash Reddy. 2013. “Performance funding for higher education: What are the mechanisms? What are the impacts?” Community College Research Center, Teachers College, Columbia University.

Gerrish, Ed. 2015. “The Impact of Performance Management on Performance in Public Organizations: A Meta-Analysis.” Public Administration Review 79: 48-66.

Heinrich, Carolyn. 2002. “Outcomes-based performance management in the public sector: Implications for government accountability and effectiveness.” Public Administration Review 62: 712-725.

Jacob, Brian. 2002. “Accountability, Incentives and Behavior: The Impact of High-Stakes Testing in the Chicago Public Schools.” The National Bureau of Economic Research.

National Center for Education Statistics. 2015. “The Condition of Education 2015.” Department of Education, Institute for Education Sciences.

Pascarella, Ernest, and Patrick Terenzini. 2005. How College Affects Students: A Third Decade of Research. San Francisco, CA: Jossey-Bass.

Shapiro, Doug, Afet Dundar, Xin Yuan, Autumn Harrell, Justin Wild, Mary Ziskin. 2014. Some College, No Degree: A National View of Students with Some College Enrollment, but No Completion (Signature Report No. 7). Herndon, VA: National Student Clearinghouse Research Center.

State Higher Education Executive Officers. 2016. “SHEF: FY 2015: State Higher Education Finance.” State of Higher Education Finance, State Higher Education Executive Officers.

Umbricht, Mark, Frank Fernandez, and Justin Ortagus. 2015. “An Examination of the (Un)Intended Consequences of Performance Funding in Higher Education.” Educational Policy 31: 1-31.

Woodhouse, Kellie. 2015. “Impact of Pell Surge: Federal Spending Has Overtaken State Spending as the Main Source of Public Funding in Higher Education.” Inside Higher Ed.


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