In Chapter 5 we studied the pros and cons of the Danish taximeter-model in which the
government allocates teaching grants to each institution based on the educational achievements of its students: funding is based on the number of passed exams. While the taximeter-system
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To foster competition for Master-students, the government could consider to (partly) reimburse the cost of moving when students decide to do their Master’s at another institute (as an alternative to the public transport pass (OV-studentenkaart)). This would promote student mobility (switching costs are reduced).
allows for more financial flexibility, the Danish experience also shows that financial flexibility is not a sufficient condition for competition. In Chapter 5 we stated that there is no compelling evidence that competition in the higher education sector has become more intense after introduction of the taximeter-system. More generally, flexibility without consumer choice (supported by diversity and information) will not result in the desired increase in competition between higher education institutions. In addition, the fact that study programs are to a large extent indivisible is another reason why student mobility during a program is limited.
It is sometimes claimed that a taximeter-system is something in between the present Dutch funding structure and a voucher-model (cf. OCenW, 2000b). In a pure voucher-system students can choose whether to attend a public higher education program or to buy their higher
education from private providers. But it is a fallacy to argue that this type of flexibility calls for a voucher-system or an incremental output-based funding model like the taximeter-system. The present output-based funding model can also be applied to the fully private higher education institutions, and this would encourage new providers to enter the higher education market.
An important advantage of the Dutch funding model, where “the price is paid at the end of the ride”, is that it provides institutions with strong incentives to dismiss incapable students as soon as possible, and to assist capable students in graduating without unnecessary delay. In the wake of the Bologna-agreement and the implementation of a two-cycle structure, the Dutch government is rethinking the funding structure for the higher education institutions. In particular, the Ministry of Education is considering the introduction of a new funding model for the HBO-sector closely resembling the Danish taximeter-system. However, from the above discussion we are inclined to conclude that the current output-based funding system needs no substantial revisions, and could be maintained under a two-cycle program structure.
Therefore, universities and HBO-institutions may be funded on the basis of the number of Bachelor- and Master-degrees conferred. For the Master-program, current policy proposals envisage that institutions will be granted more freedom to set tuition fees and to select their students. It is therefore likely that differentiation in training programs will predominantly take place at the Master-level. A natural moment for students to switch to another institution is between the Bachelor- and Master-phase.13
How much should the government contribute to the Bachelor- and Master-program, respectively? The popular view nowadays seems to be that the Master-program should be
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Advocates of privately financed graduate programs may argue that credit market imperfections are less of a problem for Master-students, while Bachelor-students typically face substantial difficulties in obtaining loans from commercial banks. However, as we have discussed in Chapter 2, these credit market imperfections do not call for government subsidisation: the provision of student loans by the government helps to solve the capital market imperfection.
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This idea finds support in the data. For instance, Goolsbee (1998) finds for the US that a 10% increase in R&D expenditures translates into a 3% wage increase for R&D employees. For the Netherlands, Marey and Borghans (2000) find that a 10% increase in R&D expenses induces in the short-run a 5% increase in hourly wages of R&D personnel. See also Cornet (2001) for a discussion of this issue in the context of the WBSO (Wet Bevordering Speur- en Ontwikkelingswerk).
financed privately.14
However, research-oriented Master-programs preparing students for a Ph.D. may yield social returns that substantially exceed private returns. These programs deliver the scientists and innovators of tomorrow. As this argument may be less valid for Master- programs with a professional (or vocational) character, public support could be targeted at specific programs which are expected to yield substantial spillovers.
A related argument to target public subsidies at research-oriented graduate programs is due to Romer (2001), who suggests to offer generous fellowships to promising young students in natural sciences and engineering.15
The idea in Romer is that when the supply of scientists is inelastic, government subsidies to foster R&D would result in higher wages for R&D workers, and thereby crowd-out the intended positive effects in terms of volume of R&D workers. Therefore, it would be more effective to encourage the supply of R&D workers, by making it more attractive for students to choose a research-oriented graduate program. This connection between science policy and R&D policy, and the implications for government support to certain fields of study is an interesting topic for future research.
Policy option: Provide public support to Master-programs (or Master-students) in those disciplines from which substantial spillovers to society can be expected.