I subscribe to the daily feed from Higher Education Strategy Associates and I enjoy the main analyst’s take on things usually. He’s got one going this week on “Performance-Based Funding” that looks promising. Here’s an excerpt from today’s post:

At one level,PBF is simple: you pay for what comes out of universities rather than what goes in.
[…]
Take graduation numbers, which happens to be the simplest and most common indicator used in PBFs. A government could literally pay a certain amount per graduate – or maybe “weighted graduate” to take account of different costs by field of study. It could pay each institution based on its share of total graduates or weighted graduates. It could give each institution a target number of graduates (based on size and current degree of selectivity, perhaps) and pay out 100% of a value if it hits the target, and 0% if it does not. Or, it could set a target and then pay a pro-rated amount based on how well the institution did vis-a-vis the target. And so on, and so forth.

Each of these methods of paying out PBF money plainly has different distributional consequences. However, if you’re trying to work out whether output-based funding actually affects institutional outcomes, then the distributional consequence is only of secondary importance.