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The Economic and Social Context of US Higher Education

Josef C. BradaArizona State University

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The University as a Firm

• What is maximized? • What is produced?• How is revenue obtained? • Who are the customers?• What are the constraints?

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What is maximized?

PRESTIGEAmong

Peers, Students, Alumni, Faculty, Employers, Governmentthe public and the participants here

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What is produced?

Graduates• Educating students is a

process of value added• MBA example• Creates competition for

good students• Appeals to US social values

– social mobility and meritocratic principle

Research• Externalities• Appropriability• Material Incentives vs

Scholarly Values

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How is revenue obtained?

• Tuition from students – does not cover even costs of instruction, much less other costs of operating the university.

• Government subsidies – largely tied to students not to institutions.

• Sales of research output.• Alumni and other private contributions.

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Who are customers?(Stakeholders)

See previous slidePlus faculty

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Implications for Spending on Higher Education

• More a private decision than a public one• Private preferences are for “more prestigious”

education than voters want and for more “product differentiation”

• Higher US spending thus partly a reflection of desire for product variety

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Strategy choices – A choice for the university

• High Quality vs Low Quality• Research vs No Research• Private vs Public

• Choice of Market Segment– Elite– Mass– “Universal”

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….another strategic choice: Globalization

• Students– Over 20% of ASU’s graduate students are foreign.*

• Faculty & Researchers– Competition becomes global – the reach of research does

too (thought leadership a key element of prestige)– H1-B Visas (1999-2000): IBM, 124;

U of Washington, 113; U of Pennsylvania, 97; Stanford, 73; Harvard, 70; Yale, 61.

*In 2005, there were 65,299 non-European students seeking a PhD in Europe.

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Constraints on strategy

• Students – can and will move; good ones in short supply – peer effects are strong

• Faculty – the same• Government – limits selectivity• Government and business shape viable

research strategies – as do prestige objectives of university and faculty

• Donors and other major contributors shape strategy

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2 key concepts

Student as customer– Prestige vs price– Price is a powerful

motivator for student performance

– Price is a powerful motivator for university performance

– Not always a good guide to “quality” of education

Professor as entrepreneur• Competes for money,

prestige, access to research resources & good students

• Active internal and external market means competition in ongoing – wage setting autonomy of universities

• Competition is performance based – research key

• Must choose how to allocate time & effort

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Pricing “education”

• Tuition < Average cost of “education”• Where does rest of the money come from?

– State schools get subsidies – though much of this goes to students

– Donations (good students => more giving, higher prestige => more donations)

– Research “profit” – requires good students & good faculty• Conclusion: better (more prestigious) schools subsidize

students more -- even if they charge higher tuition

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Other “pricing” decisions

• Subsidization by program of study

• Prestige and allocation of funds (graduate vs PhD; professional programs)

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Some thoughts for following the US model - 1

• Do US universities have a different/better objective function or just more leeway to achieve it ?– Rankings are a proxy for what we want to achieve

– not the real objective. Does Europe want the same thing as America?

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Some thoughts for following the US model - 2

• Will spending increases help Europe raise its rankings? (3.5 vs 1.5 % GDP)– Yes, but by how much.– Important synergies between $ and autonomy.– In the US, there are greater possibilities for product

differentiation and private “choice” on spending. – Europe has reformed much less in PhDs.– Less scope for globalization. In the context of this

talk Erasmus is not globalization.

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Some thoughts for following the US model - 3

• Can Europe master the evolution from elite to mass and universal higher education?

• Institutional innovation faces more resistance in a “state-led” model than in one where supply can be provided by new entrants from the private sector and evaluated by the market, not by the Minster of Education.

• Differences between self-selected and “imposed” strategies.