It's not enough (in some cases) to put the carrot in front of the donkey. You have to point to the carrot, tell the donkey it is a carrot, and that he can eat it. And work out marginal revenue and marginal cost for the donkey too. And repeat this several times. This is most true for departments in subjects that economists' prejudices tell us are less likely think like economists.Nick Rowe explaining one of the lessons of his Associate Deanship. He also gives some nice anecdotes about the principal-agent problems within academia.
The university as a whole faces a hard budget constraint. Individual departments face a soft budget constraint. Individual profs face none.Fortunately, Canterbury's internal funding model has been a fair bit more sensible than that: departments pay a per-student tax to the centre for centrally provided services and keep the rest. That works because government funding varies by type of student, so the bench sciences' usual excuse for cross-subsidization, kit costs for students, are already factored into the per-student government subsidy. We do find other ways to make life difficult though.
The very worst case I saw was when Barney was cancelled. Barney, a very large first year course, about dinosaurs or something, was one of the most profitable courses in the university. And it was cancelled, by the department.....to save money. There was any number of prissy little boutique courses that could have been cancelled. But they cancelled Barney. We had to go all the way up to the VP Finance to get Barney a reprieve.
The problem is obvious. Barney made tons of money for the university. But the individual department saved money by cancelling Barney, since nearly all the students taking Barney came from other departments and faculties. The incentives just didn't line up.