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Countering Moral Hazard in Higher Education: The Role of Performance Incentives in Need-Based Grants

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  • José Montalbán

Abstract

Using a unique reform in the Spanish financial aid program, I estimate the impact of need-based grants on student achievement and dropout decisions under different intensities of academic requirements. Utilising comprehensive administrative data from a large university, I exploit sharp discontinuities in the grant eligibility formula to identify the effect of aid on student outcomes. I find that aid eligibility has no effect on student outcomes when the academic requirements are comparable with most existing national grant schemes worldwide. In contrast, I find that need-based grants have strong positive impacts on student performance and degree completion when they are combined with more demanding academic requirements.

Suggested Citation

  • José Montalbán, 2023. "Countering Moral Hazard in Higher Education: The Role of Performance Incentives in Need-Based Grants," The Economic Journal, Royal Economic Society, vol. 133(649), pages 355-389.
    • Handle: RePEc:oup:econjl:v:133:y:2023:i:649:p:355-389.
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    2. Campos-Mercade, Pol & Thiemann, Petra & Wengström, Erik, 2025. "Performance Incentives in Education: The Role of Goal Mismatch," Working Papers 2025:5, Lund University, Department of Economics.
    3. Bach, Maximilian & Fischer, Mira, 2020. "Understanding the Response to High-Stakes Incentives in Primary Education," Rationality and Competition Discussion Paper Series 261, CRC TRR 190 Rationality and Competition.

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