The economics of scholarship allocation (1 of 2)

public economics ▪ policy ▪

Two weeks ago, the news arrived. Weeks after getting an interview – along with six other applicants – for the Fulbright Doctorate Scholarship, I was told I didn’t make it. I was disappointed. Naturally, such a refusal creates a need for closure, often through efforts to rationalize it. The typical culprit is the interview itself: there is the temptation to replay it in one’s head over and over again, trying to figure out which answer was the stinker (and yes, I have done this many times already throughout the week!).

But in addition to suspending me in time, forcing me to perpetually relive the interview moments, the news sparked an interest in a more general question about the allocation of scholarships that are funded by public money. As my experience has shown, a scholarship is a scarce commodity. The question, then, is how does one allocate this commodity in the “best” way possible?

A concept tightly connected to this question is maximization. Doing something “in the best way possible” is tantamount to doing it in a way that (is expected to) maximises the outcome with respect to a certain objective (or set of objectives). That's why the above question is actually incomplete. Tasked to allocate a good “in the best way possible”, one should immediately ask: “best with respect to what (set of) objective(s)”?

So, to what objective should one allocate publicly-funded scholarships? Principally, one should see publicly-funded scholarships as public investments. As such, its objective should be identical to that of public investments, namely to maximise the benefits that accrue to society (or “social benefits”), both in terms of direct and multiplier effects.

How do public investments achieve this objective? First, the tautology: to maximise social benefits, invest in activities that give the highest social returns. In an ideal world, this amounts to listing all possible investments, sorting them in a descending order from the one with the highest return. Once the list is there, we start investing in the activity at the top of the list and then go down the list until we ran out of money.

However, there is the second principle: Do not crowd out private investments. That is, don’t invest in activities that the private sector is willing to finance. Going back to the list above, if we want to maximise social benefits, we need to maximise the number of activities that are funded. To do that, public money should be channelled to investments that are not wanted by private investments.

(A digression: This second principle is often ignored because many people are unwilling to acknowledge that it is not the state’s comparative advantage to generate income by running companies, managing risks, and be entrepreneurial. On this, I think on this we need to keep the eye on the ball: The objective of public investments – and public activities generally – should be to maximise social benefits, not public income.)

These two principles should generally be adequate to guide the allocation of publicly-funded scholarships. However, although they look simple on paper, in practice they can be quite complicated. A lot of these difficulties have to do with our limited knowledge of the social returns to human capital investments. Some time this (or next) week, I’ll discuss in the second part some of these complexities and complications (and their relation to Fulbright committee’s decision on whom to give its scholarships to).