Funding, Competition and Quality in Higher Education

This paper explores the impact of university finance reforms on teachingquality. It is shown that the graduate tax can achieve efficiency with tuitionfees administered by the government, while student grants, pure and incomecontingent loans are bound to fail. All options are inefficient when universitieshave the autonomy to set tuition fees. Then, pure loans dominate the graduatetax and are more efficient than income contingent loans unless peer group effectsare strong. However, properly chosen uniform administered fees create an evenhigher surplus. Moreover, pure loans may make the majority of students worseoff than a central assignment system with very poor quality incentives.