The Financial Benefits and Burdens of Performance Funding in Higher Education

Abstract

Performance funding in higher education is intended to incentivize increased degree production at American colleges and universities by linking state funds directly to institutional outcomes. However, many critics suggest that such funding arrangements create systems of “winners and losers” by rewarding some institutions over others. Using a difference-in-difference methodology, this article explores the impact of performance funding on state appropriations and investigates the heterogeneous treatment effects across institution types. I find that performance funding consistently benefits high-resource institutions and imposes financial burdens on low-resource institutions. The theory of social construction and policy design illuminates the findings.