The creation of the Tennessee Education Lottery Scholarship (TELS) program provides a natural experiment where a difference-in-differences estimation design is employed to isolate how state merit aid funding may lead institutions to change their institutional grant aid. Principal agent and resource dependence theories together establish state and institutional context as well as inform potential institutional responses to the TELS program. Data are primarily observed at the institution-level from 2000 to 2009 and come from the Integrated Postsecondary Data System (IPEDS). The difference-in-differences estimation strategy incorporates multiple comparison groups and separate specifications by Carnegie Classification.

The results indicated that the nine Tennessee public four-year institutions reduced their recipient average institutional grant post-TELS. However, institutional responses differed across Carnegie Classification. Tennessee Doctoral Extensive public institutions increased the number of students receiving institutional grant aid post-TELS. Tennessee Doctoral Intensive public institutions reduced their total institutional grant and number of recipients post-TELS, and thereby decreased their average institutional grant aid post-TELS. Tennessee Master’s College and Universities, excluding Tennessee Technical University, also reduced their institutional grant aid post-TELS.

The results from this study provide some informative commentary for theory, research and policy. First, the combination of principal agent and resource dependence theories provide a more comprehensive set of potential responses that move beyond the Bennett hypothesis to suggest that institutions might not just reduce institutional grant aid. Second, this study created a comparison group of institutions subject to a state governing or coordinating board with budget authority, which produce more efficient estimates. Future research on financial aid or institutional finances may benefit from moving beyond the tradition governing board classification to include state coordinating boards with budget authority. Third, state policy on financial aid should better align new initiatives with existing institutional financial aid to ensure state funding is used effectively. With better goal alignment between state governments and institutions, it could reduce the agency problem that develops and ensure state does not duplicated existing financial aid strategies.