Scholarships and grants: how networking can help identify the best candidates.

When universities award scholarships, a large portion of the budget is taken up by administrative costs, reducing the amount that students actually receive. Economists Mohamed Belhaj, Frédéric Deroïan and Shahir Safi, demonstrate that where there are good working synergies between students, targeting a strategic sub-group of students rather than distributing funding evenly can optimise efficiency and reduced administrative costs. 

Most universities will invest large amounts in scholarship programmes to attract high-achieving students and provide them with optimal financial and other support, which encourages them to devote themselves fully to their studies. In turn, this will boost the reputation of the host institutions.

During the 2022-2023 academic year in the United States, where tuition fees are very high, students paid on average only 49% of their tuition fees, thanks to scholarships and bursaries, according to the National Association of College and University Business Officers. In these cases, a scholarship effectively works like a contract: a reciprocal agreement that binds the institution and the student, with rewards offered in exchange for specific efforts or achievements.

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However, distributing bursaries comes at a cost. The university has to manage the administration of the grants, and ensure that students are fulfilling their contractual obligations. So-called ‘contractualisation’ costs can become significant, reducing the amount that is ultimately available to students. Faced with this situation, a choice has to be made: should a small grant be offered to a large number of students, or should the funds be targeted towards a small group of selected individuals, in order to maximise the impact of the resources invested?

Through their research, the economists Mohamed Belhaj, Frédéric Deroïan et Shahir Safi explore this dilemma in a context where students develop meaningful ‘work synergies’. The term ‘synergies’ in this context is being used to describe the ripple effect that can occur when one student, in response to an incentive, can exert a positive influence on the efforts of their peers, thereby reinforcing the collective effort.

The researchers analyse how an institution, such as a university, a business or organisation, can consider the structure of a ‘synergy network’ to optimise the distribution of its resources across a network of agents, while taking into account the high associated costs. The researchers show that, when these costs become significant, it can be more effective to target a select group of agents - students in the case of a university, or employees in the case of a company - than to spread a budget as thinly as possible. The effectiveness of the approach is maintained even if the decision-making in determining the sub-group that will benefit from the synergies is more complex as a result. 

A model for optimising targeted selection

The researchers' conclusions are based on a model in which an agent called the ‘principal’ - an organisation, or an individual – wishes to encourage a network of agents to achieve more ambitious goals. The incentives can take the form of rewards given on successful completion of a designated objective. At the same time, administration and monitoring will generate costs. The model shows that the organisation has to make a choice: either it offers rewards to everyone, which can be costly, or it focuses on a small group of key agents to maximise the impact of the limited budget. The choice of an optimal sub-group is subtly dependent on the network of synergies, because synergies vary according to the connections and influence of the agents in the network. The more influential the agents are within the network, the more costly they are to motivate. The trade-off between cost and influence lies at the heart of the model.

At this stage, game theory can come into play by establishing a framework for modelling interactions between the principal and the agents. Each agent's level of effort depends not only on the specific situation, but also on the decisions of the other agents in the network. This is how synergies can emerge. For example, in a student network, if a targeted student receives a grant and increases his efforts, this may motivate his fellow students to do the same. By applying the concept of the Nash equilibrium, researchers can predict the behaviour of agents in an equilibrium situation where no participant can improve their gain by changing their strategy, given the strategies of the others. This makes it possible to determine the optimal levels of effort and the returns that the ‘main’ agent must offer in order to maximise overall effort.

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It should be noted that restricting the number of agents eligible for awards does not prevent others from benefitting. Stakeholders may form a network with its own synergies and externalities, and any extra effort on the part of one agent can stimulate the involvement of other connected agents. Certain agents in the network, who are more central and have more connections, can have a multiplying effect on other agents. Moreover, the study shows that at the same time, even if some agents do not receive contracts directly, they still have an influence on those who do, because the extent of their involvement has an effect on the way in which the principal can benefit from past contracts. The influence of these agents, who do not enter into a contract with the ‘principal’, requires rewards to be adjusted more strategically and thus helps to improve the overall effort in the network. 

The study builds on previous work, particularly that of the economist Gabrielle Demange, in which the question of contracts was not addressed. The key difference in this new research is that it takes into account the way in which agents make decisions in response to contract-specific incentives. By explicitly taking these contracts and their characteristics into account, this study reflects more accurately the economic realities of public subsidies or programmes where beneficiaries must meet certain conditions in order to receive payments, as occurs with conditional cash transfers (CCTs).

A significant cost

The European Union is a major provider of subsidies designed to encourage companies to invest in research and innovation projects, as well as member states to invest in the EU's cohesion policy. The Union is also confronted with strategic choices to increase the effectiveness of its subsidies. For the 2014-2020 period, European and State funds allocated to the European Union's Cohesion Policy amount to 531 billion euros to finance programs. Administering and managing these subsidies entails significant contractual costs. Approximately 4.5% of the sum, or 24 billion euros for the period, is required to cover the costs of managing these subsidies. Where such costs are too high, it may prove more efficient to concentrate the allocation of subsidies on a smaller number of key contributors.

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In a similar vein, performance bonuses are used in companies to motivate employees to meet or exceed certain targets. They are often linked to performance indicators, such as productivity, sales, or the achievement of specific objectives. Not only must the company define clear performance criteria, it must also monitor, evaluate, and verify employee attendance. If administration and monitoring costs become too high, the company might consider limiting bonuses to a selected group of employees, or simplifying performance criteria, in order to reduce costs while sustaining employee motivation. In all cases, the challenge is to strike a balance between the impact of incentives on all employees and the costs associated with administering them, in order to maximise the efficiency of the resources invested.

Decoding synergies

So, how can the target agents be chosen? The good news is that, whatever the associated costs, contracts offered to the targeted agents can vary and still have a positive impact, depending on their position in the network and their connections with non-contracted agents. When applied in a university context, the study suggests that it would be useful to identify the network of synergies between students as finely as possible, to know to whom a grant should be awarded. One conclusion of the study is that it is not necessarily optimal to target the students who are most connected and active in student networks.

To maximise the effectiveness of the available bursary budget therefore, it is necessary to tailor the amounts of scholarships awarded depending on a student’s influence, and their connections with others. Although this may be a complex and time-consuming process, it will ensure that limited resources can be allocated in the most advantageous manner possible.