Subsidizing Institutions vs. Outputs vs. Individuals: States' Choices for Financing Public Postsecondary Education

Governments that want to subsidize goods or services can delegate responsibility for production to a public agency as part of its overall mission, subsidize production of specific outputs, or subsidize specific beneficiaries of excludable goods and services. For public postsecondary education, the corresponding funding mechanisms are operating appropriations that delegate authority to choose outputs and beneficiaries to public colleges and universities, grants and contracts, or student financial aid. Consistent with theories explaining delegation of policymaking authority, I find that the mix of funding mechanisms depends on institutions that affect planning capacity and oversight costs: States with more professional legislatures or statewide coordinating boards delegate less, that is, they spend more on grants and contracts and need-based student aid relative to appropriations. Relative use of grants and contracts decreases as the number of institutional governing boards increases, but use of need-based aid does not.