Incentives and Resource Allocation in Universities

Abstract

How universities should adapt to an environment in which growth, both of enrollments and of public financial support, will be much slower than in the past is an important contemporary issue. In the years between World War II to the mid-sixties, intensified instructional and research demands contributed to a rapid expansion of almost all university programs. In the recent past, however, a perceived lessening of the rate of return to higher education, combined with a declining college age population, has contributed to a diminished growth rate of both demand and support. These changing historical circumstances have made resource allocation a critical problem confronting university administrators, who in the 1970s face contracting budgets, and who are saddled with economic and political problem-solving mechanisms inherited from an era of nearly unlimited growth. A new resource allocation mechanism is needed that will allow universities the flexibility and that will provide the incentives to adapt to changing educational demands in the coming decades. One currently proposed method of university resource allocation is a