Funding Instruments and Effort Choices in Higher Education

This paper presented in this Mannheim Applied Seminar examines the effects of Free College policies on student enrollment and academic performance, with a focus on the 2016 Chilean reform that granted tuition-free higher education to students from the lowest five income deciles. Using a difference-in-differences approach, the authors find that Free College increased enrollment and persistence in higher education but had modest effects on graduation and dropout rates. To disentangle the role of student effort from selection effects, they develop a structural model in which students choose effort levels in response to financial incentives. Their results highlight that while Free College expands access, it may also weaken performance incentives due to the removal of academic progress requirements. Counterfactual simulations suggest that alternative funding mechanisms could improve both access and academic outcomes by balancing affordability and incentives for effort.