The changing rationale for public funding: Why do we have publicly financed universities?

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The changing rationale for public funding Why do
we have publicly financed universities?

• Aldo Geuna
• Department of economics
• University of Torino

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Content

• Changing roles of the university
• Traditional rationale Post-WWII approach.
• Changing characteristics of university research.
• New rationale Contractual-oriented approach.
• Advantages and Potential Unintended Consequences
  What it matter is from where you start.

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Changing roles of university

1. To reproduce and transmit existing knowledge
   (Paris).

• To improve critical reasoning and other skills
• of individuals
• (i) as input to their work (Bologna) (ii) to
  develop democratic, civilised society
  (Cambridge/Oxford).

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Changing roles of university

• 3. To increase knowledge base (i) by
  pursuing knowledge for its own sake (ii) by
  developing useful knowledge.
• Berlin the Humboldian university

• To serve training and research support needs of
• economy (at regional and national levels).
• The entrepreneurial university (?)

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Post-WWII Rationale The endless frontier
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The post-1945 rationale

• Public good
• Linear process
• Budgetary expansion
• Academic quality increasing with funding
• Ex-ante judgement of research promises
• Evaluation by academic community (peers)

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Market-failure - Public good

• Nelson (1959) and Arrow (1962) laid foundations
  of economics of science
• Emphasised certain characteristics of scientific
  knowledge as a public good
• non-rival others can use the knowledge without
  detracting from the knowledge of the producers
• non-excludable other firms cannot be stopped
  from using the information
• MORE
• expansibility - The possibilities of multiple
  transfers make it possible to distribute
  information very widely without loss.
• gt
• Non-appropriable at least completely (see patents
  and see discussion on Tacitness).

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Market-failure - Public good

• gt Private benefits less than social benefits.
• Also long timescale of basic research while firms
  usually have short-term investment perspective.
• Social benefits also wider than private benefits
• Firms would not have invested in research on e.g.
  smoking-cancer link, ozone hole, global warming
• gt Firms tend to under-invest in research (less
  than socially optimal free riding)

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Market-failure - Public good

• To raise research funding to socially optimum
  level, government needs to invest.
• Main product from govt-funded research
  economically useful information, freely available
  to all.
• By increasing funds for basic research, govt can
  expand the pool of economically useful
  information.
• This information published assumed to be
  durable and costless to use.
• Close connection between university teaching and
  research means universities also produce
  graduates with up-to-date knowledge and skills.

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Linear model V Bush Social Contract - The
endless frontier

• Scientific discoveries in early 20th Century
  WW2 ? belief in linear model of innovation.
• Basic research ? App. res. ? Devlpt ? Innovation.
• V. Bush report The Endless Frontier WWII
  (radar, atomic bomb, etc)
• Government responsibility to fund basic
  research will eventually ? wealth, health
  nat. security.

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Linear model V Bush Social Contract - The
endless frontier

• Contract not very explicit re exact form of
  benefits nor when.
• Used to justify substantial increases in govt
  funding.
• Viewed as investment in future welfare.
• Science also seen as inherently unpredictable
  (serendipity), ex-ante judgment.
• Scientists in best position to judge which
  research best to fund (peer review).

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Linear model V Bush Social Contract - The
endless frontier

• Essential characteristics of V Bush social
  contract
• high level of autonomy few strings attached
• institutionalisation of peer review to allocate
  funds
• belief that basic research best done in
  universities

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Main funding mechanisms 1

• Institutional core funding for universities (not
  US) general university funding (GUF)
• block grant for teaching and research
• allocated on incremental or formula basis
• provides funding for research infrastructure
  (labs, equipments, technicians, libraries etc.)
  the well found laboratory

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Main funding mechanisms 2

• Project funding (only in some countries)
• for specific research projects additional costs
• proposals submitted responsive mode
• judged by peer review
• funding decision by committee of scientists
  (often discipline-based)

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What about mission-oriented research?

• Ignores university research funded by government
  departments and mission-oriented agencies
• e.g. defence, health, energy, agriculture, space
• Mission-oriented research (cf.
  curiosity-oriented)
• very large funding (especially in US but also UK
  and F)
• not just confined to technical universities

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What about mission-oriented research?

• Areas chosen reflected political priorities -
  demand-pull model
• US defence, space, health
• Japan agriculture, energy
• UK defence, aerospace
• France defence, nuclear energy

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Changing characteristics of university research.
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Changes in 1980s 1990s

• Driving forces
• Economic problems (recession, inflation,1970s)
• Growing costs of welfare state health,
  education, social security
• Liberal versus social-democratic views of
  government (new public management the EURO)
• Weakening of the military rational
• Globalisation and growing economic competition

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Changes in 1980s 1990s

• Driving forces
• Growing importance of scientific and
  technological knowledge the knowledge
  economy
• The emergence of new technology driven
  industries biotech, ICT, nanotech
• Massification of HE (from 7-8 to 40-70 NS)
  due to both increased demand and increased of
  students finishing secondary education
• Growing cost of research.

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Changing public research systems

• Governments (first in the UK then in other
  countries) introduced new/revised policies
• To enhance quality and efficiency of public
  research
• To stimulate business investment in research
• To strengthen research links/collaboration
  between public and private sectors
• To increase supply of QSEs

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Changing public research systems

• To adapt to needs of service sector (increasingly
  important in OECD countries)
• To achieve a target level of RD spending (e.g.
  3 in EU Barcelona target)
• To fund research in priority fields
• To stimulate public understanding/engagement.

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Changing public research systems

• Reforms aiming to make the contribution of public
  research systems more effectively to innovation
  (were they successful?)
• Universities given increased autonomy and/or
  transformed into quasi-private (NPO)
  organisations (e.g. France, Italy, Japan,
  Denmark, Slovak Republic)
• Decreased reliance on block funding and more on
  competitive project funds
• More emphasis on evaluation of HEIs and PROs (RAE
  early developed in the UK/NL)

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Changing public research systems

• More emphasis on mobility of students and
  researchers
• Changes to IPR for universities and public
  research organisations (e.g. Germany, Denmark,
  Norway, Switzerland)
• Encouragement to protect and exploit intellectual
  property (IP)
• Technology/knowledge transfer made formal third
  mission of universities (e.g. UK, Denmark,
  Norway)
• Growth in patents during 1990s although slowed
  since 2000

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New rationale Contractual-oriented approach
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The contractual-oriented approach 1

• Implementation
• Competitive mechanisms for resource allocation
• Financial quasi-market incentives to steer
  university behaviour to meet societal needs and
  increase efficiency. GUF declined in relative
  terms, and in some cases e.g. UK, Australia (but
  also in part Sweden, Denmark, Poland, Belgium)
  now allocated on basis of performance see RAE
• Policies to increase selectivity and
  concentration

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The contractual-oriented approach 2

• Project-based funding (see FIRB/ANR in
  Italy/FRANCE) increased in importance with a
  shift from responsive mode to directed programmes
  and to research linked to needs of users
  (though decrease in recent years in UK)

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The contractual-oriented approach 2

• Growing emphasis on ex post evaluation
• New government funding initiatives based on
  challenges and competition e.g. Joint
  Infrastructure Fund (especially UK).

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The contractual-oriented approach 3

• Implicit assumptions
• Possible to evaluate quality of research output
  reliably (is it? ST indicators, ISI, citations,
  metrics)
• Possible to identify most promising research
  avenues (is it? Student presentation on
  Foresight)
• Costs can be reduced without sacrificing quality
  (is possible? teaching versus research)

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The contractual-oriented approach 4

• Due to existence of economies of scale and scope,
  concentration increases output of overall system
  (do they exist? At what level? See unintended
  consequences)
• Admin and other costs associated with more
  competitive system are small cf. benefits.

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Advantages and Potential Unintended Consequences
What matters it is from where you start
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Advantages

• Creates incentives for performance (of a specific
  type).
• In some system (see Italy, France) allocation a
  pioggia create disincentives for the most
  productive.
• Scientific production is Skewed
• 60 of researchers produce one paper or the
  majority of papers is produced by the top
  scientists.
• Lotka, A.J. (1926) The Frequency Distribution
  of Scientific Productivity, Journal of the
  Washington Academy of Sciences, 16/12, 317-323.

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Skewness in Science
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Unintended consequences of the new rationale

• 1. Increased concentration of resources
• 2. Disproportionate incentives for short-term
  research
• 3. Conflicting incentive structures
• 4. Exacerbation of Matthew effect

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Increased concentration of resources

• Resources increasingly concentrated in few
  leading research universities
• Implicit assumption that there are economies of
  scale/scope
• But no strong empirical evidence for economies of
  scale/scope in university production
• Either for research itself at level of department
  or institution (but critical mass effect at
  level of group)
• Or for joint production of teaching and research
• Some scale economies for teaching and admin, and
  hence perhaps indirect benefits for research
• Mobility of students and researchers

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Increased concentration of resources

• Adverse consequences
• Fewer resources in lower ranked departments/
  institutions to support new ideas and new people
  decreased diversity may be detrimental to
  research in longer term, even if more efficient
  in short term
• Lower ranked institutions less able to contribute
  to meeting regional needs
• Temptation to undercharge, bidding for funds on
  marginal rather than full-cost basis driving
  down prices to detriment of universities (become
  financially overstretched, staff overworked)
  Evaluation of real opportunity costs.

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Disproportionate incentives for short-term
research

• Evaluations tend to focus on short term e.g.
  publications in last few years
• Emphasis on addressing needs of users may lead to
  neglect of longer-term research
• Lack of incentives for long-term, path-breaking,
  risky research
• Decreased variety of research lowers probability
  of scientific novelty

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Conflicting incentive structures

• Different competitive funding schemes may create
  conflicting incentive structures
• e.g. high-quality publications for RAE VS helping
  users
• Weakened teaching incentives
• Traditional academic incentive structure (open
  science) in conflict with private-oriented
  incentive structure linked to business-financed
  research
• Work with industry may bring problems of secrecy,
  delay in publication etc.
• Risk that incentive structure of subsidiary
  source of funds may dominate university research
  behaviour

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Exacerbation of Matthew effect

• Merton (1968) success in research brings status
  and funding further increases chances of future
  success
• To them that hath shall be given the Matthew
  effect
• Evidence shows very small proportion of
  researchers produce large share of most
  influential publications
• New economics of science (e.g. David)
  elaborated this in terms of path-dependence and
  self-reinforcing mechanisms (e.g. increasing
  returns)
• Growing range of uncoordinated funding sources
  reinforces cumulative, self-reinforcing process
• Means that researchers at lower-status
  universities locked into a vicious circle as
  compete for resources and status again lowers
  diversity