The College Cost Disease

The College Cost Disease

Higher Cost and Lower Quality

Robert E. Martin

College cost per student has been on the rise at a pace that matches – or exceeds – healthcare costs. Unlike healthcare, though, teaching quality has declined, and rapidly rising costs and declining quality are not trends easily forgiven by society. The College Cost Disease addresses these problems, providing a behavioral framework for the chronic cost/quality consequences with which higher education is fraught. Providing many compelling insights into the issues plaguing higher education, Robert Martin expounds upon H.R. Bowen’s revenue theory of cost by detailing experience good theory, the principal/agent problem, and non-profit status.

Chapter 3: Reputations and the Chivas Regal Effect

Robert E. Martin

Subjects: economics and finance, economics of education, education, economics of education


3.1 INTRODUCTION Simple demand theory suggests applications and enrollment should decline as tuition goes up. The opposite appears to be true among selective colleges and universities;1 when they raise tuition their applications and enrollments increase, which implies their demand curves slope upward with respect to tuition. This phenomenon is known as the “Chivas Regal effect” among enrollment managers, after the expensive Scotch whisky of the same name. In an article for Money magazine, Penelope Wang reports: “The high sticker price is actually part of many colleges’ marketing strategy .  .  . schools have often found that raising tuition attracts more applicants because families tend to equate high price with quality. Marketers call it the Chivas Regal effect” (Wang, 2008, 89–90). Wang reports recent instances where colleges increased tuition by double digit percentages that were followed by significant increases in enrollment. There are numerous anecdotal reports concerning institutions that experimented with tuition increases and found that enrollments rose after tuition was increased (Larson, 2001). While this anomaly is well known within higher education, economists have not considered its origin and persistence, or what it implies about higher education economics. The Chivas Regal anomaly exists because students and parents are uncertain about quality. If students and parents are well informed about quality, they have no need to use a proxy for quality, such as tuition. They would make enrollment decisions based on the institution that offers their preferred quality at the least possible cost. 3.2 EXPERIENCE GOODS AND ASYMMETRIC INFORMATION An experience good...

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