Merit rating and formula‐based resource allocation

Formula‐based allocation schemes are often proposed as a means of making the allocations of public funding more equitable, and more efficient. Unfortunately, these goals may be undermined by imperfect measures of merit. In particular, if the measures are subject to random variation or manipulation, the formula‐based schemes may lead to disincentives and lack of efficiency. Develops a simplified model of a hierarchical allocation system and analyse stochastic models for the most important sources of variation in the system. Practical proposals for limiting the variability are studied and the framework is applied to the Finnish university system.