Optimal design for study‐abroad scholarship: the effect of payback policy

Abstract

This paper examines the optimal design for a study‐abroad scholarship. A student is awarded a fixed‐amount scholarship to participate in the program but will have to pay back the scholarship if his/her performance fails to meet a target level. When the program is highly productive, the scholarship is low and the target performance is high. The opposite case prevails if the disutility from studying is high. A higher program cost leads to a higher target performance and a cost sharing between the university and the students. When the uncertainty regarding performance evaluation in the program increases, the target performance decreases while the scholarship amount is higher.

Keywords:

• study‐abroad scholarship
• optimal payback policy

Acknowledgements

The authors wish to acknowledge Beth Guajardo for excellent research and editing assistance. Nathan Berg and an anonymous referee provided very helpful comments and suggestions.

Notes

1. Echoing Goodwin and Nacht (1988), Wessel (2007) found that grade point average was not a success predictor for her study‐abroad program.

2. Under the partial payback policy, depending upon the extent the student underperforms the target level, the student is asked to pay back a different percentage. According to the authors’ knowledge, currently there is no university adopting partial payback policy. On the other hand, in some cases there is no payback condition. Thus, our paper considers only the full payback policy.

3. The university can choose whether or not to adopt the full payback policy. This possibility is contained in our framework. When the target performance is set at the lowest possible level, no one will fail to meet the criteria. Consequently, no one has to pay back the scholarship money.

4. Study abroad may bring enjoyment. This factor will reduce the disutility and, for our numerical analysis it can be modeled as a reduction in β. Alternatively, one can incorporate a peculiar benefit additively. This will correspond to a reduction in the cost of study abroad (i.e. a reduction in c).

5. We have in mind a summer study‐abroad program. Thus, the student is either studying abroad or not taking any class at all. It is a simplifying assumption. We can allow the student’s ability to change if he/she does not study abroad. This will introduce another parameter. Intuitively, it reduces the (relative) productivity of the study‐abroad program.

6. Owing to competition for limited budgets, any program must demonstrate its benefits to students for funding purposes. Although some universities attempt to use study‐abroad programs as marketing tools to attract new students, they need to balance the quality of the institution against the profit motivation.

7. We adopted uniform distributions to start with our numerical analysis. However, in this case the corner solution always prevails such that for the optimal target performance is set at the highest level. The result may be related to the thick tail of the uniform distribution. In fact, Table 3 shows that, when the tail for the underlying normal distribution becomes thicker, the target performance increases.

8. From (k − h) ≤ kh/(h + s), we derive kh/(h + s) ≤ (h ²/s).

9. There is no reference or actual data available for the variables we consider. Nonetheless, this paper provides theoretical analysis aiming at providing qualitative conclusions and implications. A variable can be measured in any possible unit, as it would have no effect on the conclusions.