Funding Instruments and Effort Choices in Higher Education

Abstract

This paper examines the effects of Tuition-free Higher education (TFHE) 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, we find that TFHE increased enrollment and persistence in higher education on the eligible but had modest effects on graduation and dropout rates. To disentangle the role of student effort from selection effects, we develop a structural model in which students choose effort levels in response to financial incentives. Our results highlight that TFHE expanded access, in particular for low-achieving students. Despite the removal of academic progress requirements, we found no evidence of weakening performance.