Dahlia Remler and Elda Pema are studying this question (do you know of an ungated copy?) but they don't yet have clear answers:
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.
Here is an excellent summary of the piece, with discussion.
Can MR readers set them straight? One hypothesis is that donors prefer to affiliate with research rather than with higher teaching loads and, until the financial crisis, donors have been rising in importance for many universities.
You might also claim that faculty prefer to do research, but why are faculty getting their way more than before? (And why don't faculty just take the lower teaching load without the research requirement, if they are in charge of this evolution?) Or are you wishing to claim that research ability is a good proxy (the best available proxy?) for teaching ability? I doubt that.
My hypothesis draws on the tipping point idea. Due to coalitional politics, it's hard to keep a happy medium, so the most valuable members of the department, whether defined in terms of teaching or research, push for higher research standards than they might otherwise privately favor, if they could have their way. (This happens in both "research-teaching" departments and research departments.) They fear that turning the keys over to "the barbarians" won't much improve teaching either. Research prowess is one of the most efficient bases for organizing competing coalitions. Didn't Dr. Seuss write a novel about this?
Ideally there should be a better way to keep down the losing coalition but it
is hard to find and implement in an incentive-compatible fashion.
One implication is that when growth is high, relatively tough research standards are needed to keep down the losing coalition. When personnel is stagnant or shrinking, the emphasis on research may be less necessary because there is less chance of a shift in power.
