Performance-Based Resource Allocation in Higher Education: A Black Box Containing the Paradox of Increasing Efficiency and Decreasing Productivity

To cope with escalating financial resource limitations from both expanding demands for higher education and experiencing a relatively reduction in public support, higher education units have profoundly adopted a performance-based resource allocation mechanism in recent years. Nevertheless, empirical evaluation findings show that the presumed improvement in performance has not been fulfilled. Using seven sets of data and performing statistical simulations based on the Malmquist index, we evaluate the effectiveness of both input-based and performance-based resource allocation mechanisms. The findings show that input-based resource allocation faces massive inefficiency. In contrast, performance-based resource allocation is accompanied by complete efficiency as well as a substantial reduction in productivity. Hence, a critical paradox has emerged. The estimates of the components of the Malmquist index provide essential evidence on the fact that improvements in efficiency due to performance-based resource allocation are artificial rather than real, and productivity shrinks due to underutilization of production capacities. The results highlight the need for finding and adopting a superior resource allocation mechanism.