In recent years there has been wide-ranging debate on the advantages and drawbacks of the rationale for resource allocation to university research. The post-World War II rationale for public support of science has been challenged by a more contractual-oriented vision of how to support research. The academic debate has provided a diverse set of descriptions and explanations with some views strongly supporting the contractual-oriented rationale and others critical of it.  The debate transcends the academic circle, as illustrated by the large number of national government reports: for example, Commission Jacques Attali (1998) for France, House Committee on Science (1998) for the United States, and National Committee of Inquiry into Higher Education (1997) for the United Kingdom. 
This article examines how changes in the rationale for science funding might influence the behavior of universities in European Union (EU) countries and the USA.  The article begins by describing the changes in university research funding for a selected group of EU countries during the period 1981-1996 and goes on to analyze the contractual-oriented vision of university research funding and its consequences. The primary focus is on the negative unintended consequences of the new rationale. It is shown that the short-term efficiency gains resulting from the quasi-market incentive structure introduced by the new rationale could be counterbalanced by long-term disadvantages arising from unintended outcomes. This paper does not provide a quantitative comparison between long-run negative effects and expected short-term benefits because it is arduous, if not impossible, to exactly quantify these effects. Instead, the paper provides a critical analysis of the relevance of the negative unintended effects of the n ew contractual-oriented rationale for university research funding. Finally, national specificities in connection with university researchers that are relevant for national policy are subsumed, the purpose here being to create a comparative analysis.
In his original work on US universities, Veblen (1918) proposed economic explanations for the institutional behavior of universities, focusing particularly on the introduction of business principles into university policy. Since this seminal work, it is mainly historians, political economists, and sociologists who have been concerned with understanding the behavior of universities. From the 1960s onward, with the development of human capital theories, economists focused some of their research on the university (e.g., Becker 1975 and Schultz 1960). However, despite this new interest, it was mainly the educational aspects--the contribution of universities to the production of the human capital of graduates or others that leave the university to enter other sectors of the economy-that were taken into account, leaving aside the analysis of the overall behavior of the institution or its specific contribution to society's stock of scientific and technological knowledge. While this research endeavor led to the devel opment of the economics of education, it did not equally promote the development of the economics of university-based research. 
At the beginning of the 1960s, Nelson 1959 and Arrow 1962 laid some of the foundations for the current economics of science.  These two papers underscore the fact that the properties of non-excludability and non-rivalry in consumption prevent the creator of scientific knowledge from fully appropriating the returns from investments in knowledge creation. Moreover, as the marginal costs of duplicating scientific knowledge are very low, scientific knowledge can be characterized as a public good, which prevents the producer from capturing the benefits stemming from the production of new knowledge. Therefore, market forces are inadequate to deliver the socially optimal level of scientific research. As a result of this market failure, private investment is socially insufficient and the state has a legitimate role in taking responsibility for the support of a sizeable fraction of scientific research.
Scholars in the economics of science have been mainly concerned with analysis of the behavior of the individual researcher.  With the exception of the works of P. Dasgupta and P. A. David (1987; 1994), the scholarly work in this area only marginally considers the issues related to the institution where the research is carried out and does not analyze the interactions among the various organizations forming the system of innovation.
Throughout the 1980s and 1990s, attention increasingly has been devoted to the institutional analysis. On one hand a large literature mainly within the framework of political economy, institutional economics, and national systems of innovation has developed theoretical concepts in the broad area of the national systems of innovation useful for the understanding of university behavior.  On the other hand, a number of studies have focused on how different micro-decisions and micro-incentives generate perceptible differences in institutional behavior.  Most of them originated from, and referred to, the Anglo-American context. Recently, especially in countries such as the United States, the United Kingdom, and Australia, market forces and government-simulated market actions (via performance-based funding systems) have significantly influenced the behavior of universities (Geuna 1999; Massy 1996). These changes toward a stronger market orientation for higher education systems have stimulated further research on the economics of university-based research.
The remainder of this article extends the literature on the economics of the research conduct of universities by analyzing the behavior of European universities over the past fifteen years and proposing an interpretation of the possible unintended consequences of a more contractual-oriented rationale for the funding of university research. The second section analyzes the evolution of university research income in ten EU countries during the period 1981-1996. The third section briefly reviews the confrontation between the post World War II rationale and the developing new rationale for scientific funding and further pursues the analysis of the characteristics of the contractual-oriented rationale. The fourth section focuses on the long-term unintended consequences of the new rationale. The last section offers concluding comments.
Changes in University Research Funding
After World War II, the higher education systems of EU countries witnessed an impressive growth in the numbers of students and staff and in spending. For example, the number of students in the EU countries increased from about one million in 1960 to approximately nine million in 1990. In the same period, the gross enrollment ratio--i.e., total enrollment, regardless of age, divided by the population of the age group 20-21--grew from less than 10 percent to around 30 percent, depending on the EU country. This rapid growth was also connected with a rise in society's expectations of economic returns (Geuna 1998b).
These two phenomena have led to conflicting pressures on the institutional organization and role of the university. Examples of the tensions characterizing contemporary universities are (1) incompatibility between the demands of elite and mass higher education; (2) friction between curiosity-driven research aimed at the researcher-directed advancement of the knowledge frontier and targeted research driven by the needs of society; and (3) the different impacts of private and public financing. From the early 1980s onward, the policies and priorities of universities have been increasingly influenced both by the quest for nationally relevant university research and by the pressure for accountability and cost reduction. Although these changes vary from country to country, they are driven by the same forces and have similar overall aims.
University Research Income
One of the most pertinent pieces of evidence highlighting these changes can be found in the changing structure of university income. University income stems from four main sources: general government grants or general university funds, direct government funds, internal funds, and the sale of academic services. By far the most important source of university funds in Europe is government funding. Depending on the country, the responsibility for the public funding of universities is attributable to different levels of government. It can be the responsibility mainly of central government (Austria, Finland, Denmark, France, Italy, Ireland, The Netherlands, United Kingdom), mainly of the regional government (Belgium, Germany), or shared between the central and regional governments (Spain) (OECD 1995).
Government funds to universities are funnelled through three different channels: incremental funding, formula funding, and contractual funding. In the first, funds are allocated on the basis of past expenditure levels with incremental resources made available for the development of new activities. This funding mechanism was the most prevalent in the expanding university systems until the early 1980s (OECD 1 990b). Under formula funding, the budget of the institution is determined by some form of assessment of the actual institutional expenditure per student enrolled or expected to be enrolled. These funds are combined with general research funds according to a ratio of government funding for teaching compared with research, e.g., a 60:40 split. Research funds can also be determined by a formula system that allows the distribution of the funds in a selective way on the basis of research record. Contractual funding is applied via tender schemes. Public funding agencies issue targets in terms of student numbers or research and the various institutions apply for the funds to carry out specified tasks. There are different forms of contracting...