(Un)desirable effects of output funding for Flemish universities

Governments introducing output parameters (e.g. graduation numbers) in the funding rule of universities believe that it will induce universities to raise their teaching efforts while educational standards will remain unaffected. In this article we first show on theoretical grounds that this desire can only be fulfilled if there exist positive interaction effects between student ability, student effort and teaching effort in the educational production function. Secondly, even if this is the case we argue that universities attracting more students with a vulnerable socioeconomic background will not be rewarded for raising their teaching effort in the same way as other universities. Empirical data on success rates of Flemish university students reveal indeed a strong correlation between students' probabilities of success and socioeconomic background. Moreover, we find a strong social clustering within universities.