Dahlia K. Remler (CUNY, Baruch College) & Elda Pema (Naval Postgraduate School, Graduate School of Business & Public Policy) have posted Why do Institutions of Higher Education Reward Research While Selling Education? on NBER.  Here is the abstract:

Higher education institutions and disciplines that traditionally did little research now reward faculty largely based on research, both funded and unfunded. Some worry that faculty devoting more time to research harms teaching and thus harms students' human capital accumulation. The economics literature has largely ignored the reasons for and desirability of this trend. We summarize, review, and extend existing economic theories of higher education to explain why incentives for unfunded research have increased. One theory is that researchers more effectively teach higher order skills and therefore increase student human capital more than non-researchers. In contrast, according to signaling theory, education is not intrinsically productive but only a signal that separates high- and low-ability workers. We extend this theory by hypothesizing that researchers make higher education more costly for low-ability students than do non-research faculty, achieving the separation more efficiently. We describe other theories, including research quality as a proxy for hard-to-measure teaching quality and barriers to entry. Virtually no evidence exists to test these theories or establish their relative magnitudes. Research is needed, particularly to address what employers seek from higher education graduates and to assess the validity of current measures of teaching quality.

In today's Inside Higher Ed: The Mystery of Faculty Priorities, by Scott Jaschik:

One of the much debated trends in higher education in the last generation or so is the increasing emphasis on research. Of course the very concept of the research university is based on faculty members who view research as central to their jobs.

But research expectations have grown at many institutions where the missions — at least until recently — have been primarily focused on teaching. And as Dahlia K. Remler and Elda Pema note in a provocative new paper, the emphasis extends beyond research that pays for itself.

"For faculty who engage in funded research, there is no economic mystery: research is the product being sold and it makes sense to emphasize it. However, the rewards apply to unfunded research also," they write, in an analysis released by the National Bureau of Economic Research. "Moreover, the phenomenon of faculty rewards for research is prevalent and growing in the humanities, law schools, and other disciplines with little or no funded research — a trend that has persisted for decades, across schools and across geographical boundaries." …

The authors suggest that higher education would benefit from figuring out just why this phenomenon has taken place, given its expense in money and faculty time. Further, they note that the trends appear to run counter to the desire of many experts on higher education who would like to see teaching receive more emphasis — not to mention the many critics of higher education who argue that the research emphasis drives up costs and denies students the attention they deserve.

Among the theories that the authors say could be at play, a number of which challenge conventional wisdom and most of which the authors find still need evidence to back them up:

• Students gravitate toward research orientations.
• Research makes professors better teachers.
• Research-oriented professors help sort students by being poor teachers.
• Research quality has become a proxy for teaching quality.
• Altruism.
• Faculty members like to do research.
• Envy and prestige.

The authors both explain why these theories may apply and poke at them a bit. But they suggest that higher education has real risk in not understanding why more individual professors, disciplines and institutions are embracing the research model. There is a growing teaching-only model, they note, and it involves trends that many in academe view with some skepticism.