(standard) economics and public policy - investigating ... · (standard) economics and public...

(Standard) Economics and Public Policy - Investigating Vocational Education and Training as (Experience and) Credence

Goods

Uwe Dulleck (QUT - QuBE and ANU – Crawford School of Public Policy)

CESifo Lecture 2, December 2016

VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016

Introduction


Outline

• Why (experience and) credence goods and VET?

• A simple framework • The VET systems in Australia in the light of the

simple framework • Efficiency and Inefficiency on VET markets • Potential Solutions to Inefficiencies of VET

markets


What is special about these goods/services?

• (Nelson, JPE 1970, Darbi and Karni, JLE 1973)

• “Standard” goods … have well known (standardized) characteristics/quality, ideally you know where to get them and no transaction costs are involved (petrol, bricks, milk (?), spring water).

• Search goods … have characteristics that can be observed before buying the good, but one has to “see” the good (clothes).

• Experience goods … have unknown characteristics, but after buying/using the good one finds out about characteristics (wine, electric appliances, tools).

None of the above require (really) an expert to inform clients (stake holders). (Buyers know their type – all strictly prefer high quality over low quality.)

• Credence goods …a buyer neither before nor after purchase knows exactly what he/she needs. An expert seller does know it. (Buyers do not know their type.)


Another view on Credence Goods • Unobservable quality (dolphin friendly tuna) • Problem: How can we ensure honest certification or? What

are incentives for experts who are able to “observe” quality at a cost.

• Third party certification: Loss of reputation (grim-trigger equilibrium) (McCluskey and Loureiro, JAgrResEcon 2005), or Activists (Feddersen and Gilligan, JEMS 2001) or government regulation (Baksi and Bosi, EnvResEc 2007)

• Labelling via a retail channel: Leveraging on the reputation of the retailer, i.e. the retailer has an incentive to check on the truth of promised characteristics. (Chu and Chu, Marketing Sc 1994)

See Credence Attributes: Making honesty the best policy, Publication by the Department of Justice, Victoria, 2010.


VET as Experience Goods

• In line with the alternative view on Credence Goods, VET can be seen as a special case of an experience good.

• Students cannot judge the quality of a course before enrolling (maybe even not afterwards – in particular when they find a job).


Solutions

• Problems to address – Quality of service provision – Communication of program quality – Potential use of irrelevant incentives (?)

• Implications for welfare


A simple framework

Students • Vary in their (marginal) willingness to pay (the benefit

they derive for a high quality education/course): vi = vi

h – vil.

• It is efficient for a student to get a low education at cost: (for all i vi

l>cl). • Frequency of students with high wtp: h.

• Students cannot observe before enrollment the quality of a program.


The Model (Continued) VET providers

• Have costs to provide courses (Cj and cj, ch ≥ cl). • Receive subsidies (Sj and sj) • Choose the quality of the program and set a price p. • Communicate the quality of the program to the

student (cheap talk)


The Model (Continued)

The Experience Goods problem • Students receives value vi

k, with vhigh>ch-cl>vlow. • It is efficient to have both types of VET providers, but

there exists an incentive to overstate quality of a program.

Course quality Student wtp

High Low

High vh –ch>vl –cl>0 efficient outcome

vl –cl>0 too low quality

Low vh –ch<0<vl –cl too high quality

vl –cl>0 efficient outcome


Game Tree

Provider chooses price Nature: chooses wtp of student student accepts or rejects provider chooses course quality

p

vh vl

h (1-h)

a r a r

high low high low

(p+s-ch,vh-p) (p+s-cl,v0-p) (p+s-ch,vl-p) (p+s-cl,v0-p)

(0,0) (0,0)

Undertraining Overtraining


Solutions

• Problems to address – Quality of service provision – Communication of program quality – Potential use of irrelevant incentives (?)

• Implications for welfare


Solutions

• Regulation (quality assurance) • Reputation / Repeated purchases • Warranties

• Discuss costs and possible implementation

– MyVET – feedback platforms – Conditional payments of fees


Expert Services (in this seminar)

• Sawbones, Cowboys and Cheats

• Doctors, Mechanics, Computer Specialists (D&K 2006)

• People/Sellers/Providers that know more about your needs than yourself.

• Darby and Karni (1973) – Credence Goods, buyers are not able to find out which quality they need (not even after a – successful - treatment).

• Problems: Inefficient (Over- & Under treatment), Overcharging


A simple framework

Students • are ex ante identical (the probability to have a certain

ability and derive the same benefit if successful with the education)

• Want to study

• do not know their ability, they only know: - they are of high ability (are able to get a high

qualification) with probability q - they are of low ability with prob. 1-q

• they are matched with one seller who provides treatments


The Model (Continued) VET providers

• Have costs to provide courses (Cj and cj, ch ≥ cl). • Receive subsidies (Sj and sj) • set fees/prices ph and pl for the two (n) programs

treatment (with ph ≥ pl) • can observe the ability of a student

• decides whether to recommend h or l course/program to the student.


The Model (Continued)

The Credence Goods problem • receives value vj if they can graduate successfully

(their ability ai is greater than the difficulty dj)

Course difficulty Student ability

dl dh

al vl-pl efficient outcome

0-ph overtraining

ah vl-pl undertraining

vh-ph efficient outcome


Timing of Decisions

1. VET provider posts price

3. VET provider observes the student’s ability and recommends a course

2. Student decides to engage with the sector

4. Student chooses whether to enroll

5. Student succeeds or fails based on ability and

difficulty of the course

Government sets subsidies

VET Provider decides to enter market

Focus of the analysis


VET as Credence Goods – Game Tree VET provider posts prices

Student enters market or not

Nature determines student ability

VET Provider recommends

Seller

charges

in out

ph, pl

h h l l

ph ph pl pl

q 1-q

Overtraining student benefit from education is 0

We assume Verifiability, thus Overcharging is ruled out

ai=h ai=l

Undertraining student benefit from education is lower than his/her potential

Efficient outcome Efficient outcome


The frame work and VET policies in different states

Table 3.1 Variable in Model State Comment

𝑆𝑆𝑗𝑗

ACT, TAS, NSW, NT QLD, VIC

TAFE contribution

Public VET providers receive some sort of unconditional financial: ACT, TAS, NSW, NT - non-contestable

appropriation QLD - annual grant to cover assets costs VIC – committed special funding for a period

to assist TAFEs with the transition to the new funding regime of over $370 million.

𝑠𝑠𝑗𝑗

ACT, VIC

QLD

TAS, NSW

NT1 SA, WA

One rate for state and public providers

All fully subsidised

Different rate for private and public providers

Per student prices or subsidies paid to VET providers, usually in subsidy bands or levels: ACT – three different bands A > B > C

VIC – five different bands A > B > C > D > E QLD – four different levels TAS, NSW – Variable rates All NT Training Entitlement are fully subsidised

(100%) SA, WA – Public provider are paid a higher

rate than private providers

Notes: 1 Subsidies under the NTs pilot program are different for public and private providers. 2 In NTs pilot program, private VET providers are allowed to charge student a fee. These fees are not capped but typically low in the range of $100 to $300. Information taken from Bowman, K & McKenna, S (2016).


The frame work and VET policies in different states (continued)

Variable in Model State Comment

𝑝𝑝𝑗𝑗

WA, TAS, NT2

NSW

SA, VIC, QLD

Fees students have to pay

Fees that can be charged to a student: WA, TAS, NT – Tuition fixed, Discretionary

variable NSW – Fixed, Fees are capped at $2000 for

commencing students in 2015 SA, VIC, QLD – Variable fees

ACT, SA NSW

Regulated fees and prices

Fee/price regulation by state government: ACT – Semi-deregulated, meaning set within a

published minimum and an unpublished maximum fee

SA – Minister can set maximum fee chargeable for a course or specify courses for which no fee may be charged

NSW – Fixed base price is set for each qualification. Prices range from $1000 - $10000.

Notes: 1 Subsidies under the NTs pilot program are different for public and private providers. 2 In NTs pilot program, private VET providers are allowed to charge student a fee. These fees are not capped but typically low in the range of $100 to $300. Information taken from Bowman, K & McKenna, S (2016).

Table 3.1


Efficiency and Inefficiency on VET markets

Result 4.1 If the VET provider is only driven by economic incentives, any student will be recommended to enrol in the course that yields the highest marginal financial contribution for the provider. In particular, the provider will • Recommend the appropriate course if (ph+sh-ch)= (pl+sl-cl); • Recommend undertraining if (ph+sh-ch) < (pl+sl-cl); and • Recommend overtraining if (ph+sh-ch) > (pl+sl-cl). These results follow from Lemmas 1-3 presented in the accompanying technical report.


Intuition Figure 4.1: Economic incentives for over- and undertraining on Credence Goods VET markets.

ph

ph= sh-ch

= sl-cl

Under- training

ph-sh-ch= pl+sl-cl

pl

Overtraining

Appropriate recommend -ation


Efficiency on VET markets

Result 4.2 If VET providers are free to set their student fees and a large enough number of students make rational choices about their interaction with VET providers, they will always choose fees that provide them with an incentive to recommend the appropriate course to a student.


Intuition Figure 4.2: Student benefits from different (prices) offered by VET provider

pl+sl-cl

ph+sh-ch

Student’s benefit

q(vh-ph) +(1-q)(vl-pl)

q(vh-ph)

(vl-pl)


Over- and Undertraining on VET markets

Result 4.3 Explicit and implicit regulations or constraints on the price setting by VET providers, including non-negative fees or a monotonic fee structure for different courses can lead to economic incentives for VET providers to over- or undertrain students.


Solutions – Getting subsidies right

• The technical report looks at subsidies that maximize expected welfare for students.

• If the distribution of abilities is balanced (not too different frequencies) sl=sh is welfare maximizing.

• In general, the difference in subsidies cannot be higher than differences in costs to offer the course.


Solutions - Liability

• Dulleck and Kerschbamer (2006) and Dulleck, Kerschbamer and Sutter (2011) show that liability can increase efficiency on Credence Goods markets.

• Reputation can serve this functions. Information about VET providers should summarize labor market outcomes (not – only - student evaluations).

• Payment of VET providers conditional on job market outcomes (income contingent fee payments) -> risk of providing undertraining incentives.


Solutions – Regulating capacities

• Emons (1997, 2001) shows that limited capacities if they mirror the distribution of abilities can help to overcome credence goods problems.

• Important, capacities cannot be set given industry need but need to match student ability distribution.

• If this is the case VET providers have no incentive to send students to the “wrong” program as enough students for this program will apply.


Solutions – Independent Brokers

• Dulleck, Gong and Li (2015) discuss the role of independent advise on Credence Goods markets.

• Brokers need to be separated in their income from course enrolment decisions of students.

• Consider the reason why VET providers are good advisors for students. Do brokers have the same skill/experience? (D&K 2006, commitment)


Conclusions 1. A too tightly regulated VET market can lead to inefficiencies. 2. If VET providers are completely free to set prices themselves,,

competition will ensure that they choose prices that incentivize them to recommend the appropriate program students.

3. Inefficiencies on (price-deregulated) credence goods markets may follow from other explicit or implicit restrictions on providers. If prices have to be non-negative (no net-gifts to students) and/or have to be monotonic (high qualifications need to carry high fees than lower qualification) then inefficiencies may result from misaligned government subsidies.

4. In case constraints lead to inefficiencies on credence goods markets, we discussed three potential solutions: introducing liability, capacity regulation and independent broker.


Thank you

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