Funding of higher education institutions through the lens of agency theory

Abstract

This chapter explores the application of agency theory in understanding funding mechanisms for higher education institutions (HEIs), with a particular focus on performance-based funding (PBF). Agency theory, which examines the principal–agent relationship, provides a framework for analysing how economic incentives align HEIs’ actions with public policy goals. The chapter discusses the strengths of agency theory, such as its clarity and predictive capabilities, in framing funding and monitoring modalities. It also highlights the theory's limitations, including its narrow focus on self-interested behaviour and the challenges posed by informational asymmetries. Empirical evidence on the effectiveness of PBF in enhancing HEI performance is reviewed, revealing mixed results and a need for further rigorous research. The chapter concludes that while agency theory offers valuable insights into HEI funding dynamics, it requires empirical validation and a nuanced understanding of real-life complexities. It calls for more comprehensive studies to test the assumptions and impacts of PBF, especially in diverse contexts. The findings underscore the importance of designing effective funding policies that consider both economic incentives and the broader organisational environment of HEIs, ultimately aiming to improve educational and research outcomes.