The Effects of the Organization of Higher Education on Incentives and Performance

Clair Smith

Advisor: Donald Boudreaux

Committee Members: Richard Wagner, Todd Zywicki, School of Law

Enterprise Hall, 318
December 10, 2008, 07:00 PM to 07:00 PM


Higher education in the U.S. is provided by an interesting mix of public, private non-profit, and for-profit institutions. The for-profit educational firm benefits the residual claimant owners and thus has the greatest incentive for efficient operation. The public and private non-profit schools have less efficient incentives, but benefit from charitable donations and government appropriations. While the for-profit schools maximize profit, the non-profit schools may seek to maximize an assortment of variables, most of which are incorporated into the concept of reputation. Smaller schools with a common mission or vision may be better able to reduce the inefficiencies of non-profit management than the large universities, which function more like established models of government bureaucracy. Benefactors of the schools with a specific and unique purpose or mission may be more concerned about furthering that particular cause or purpose than strict efficiency in delivering educational services. Among public institutions, theory suggests that greater school autonomy should lead to superior performance. Previous studies have found that the level and degree of state control over the public institutions does not affect performance as expected. This paper suggests that this is because the role of reputation is predominant and overshadows the effect of state-level control. Greater independence from state boards should facilitate better performance, but does not guarantee it. Appropriations and endowment revenue both serve to reduce reliance on tuition revenue, to increase the ability of schools to price discriminate, and to enable greater focus on reputation. Because reputation changes slowly and incrementally, top-tier schools are entrenched and have significant staying power.