The ongoing transition from layered-cake federalism to marble-cake federalism led to an increasing role of intergovernmental grants in many countries. The field of higher-education is an example. Central governments in federalist countries claim that earmarked resources can better achieve policy goals. This discussion paper evaluates the goal attainments in a billion-worth program for higher education in Germany, the higher-education pact (2007—2020). Two key objectives were concerned with the program: Firstly, to enhance teaching quality, measured by the student-faculty ratio—secondly, the promotion of enrolments in the STEM faculties.
This discussion paper is the first comprehensive assessment of the grant program. We find some notable flaws of centrally-provided grants and shed light on some unwanted effects from central-government intervention. Further, we study two economic issues on intergovernmental grants and find mixed evidence for flypaper behaviour and fungibility activities. Our results indicate little backing for funding higher education by grants-in-aid.