Countering Moral Hazard in Higher Education: The Role of Performance Incentives in Need-Based Grants∗

Abstract

Using a unique reform in the Spanish financial aid program, I estimate the impact of need-based grants on student achievement and dropout decisions under different intensities of academic requirements. Utilising comprehensive administrative data from a large university, I exploit sharp discontinuities in the grant eligibility formula to identify the effect of aid on student outcomes. I find that aid eligibility has no effect on student outcomes when the academic requirements are comparable with most existing national grant schemes worldwide. In contrast, I find that need-based grants have strong positive impacts on student performance and degree completion when they are combined with more demanding academic requirements.