Chapter 4: The Principal/Agent Problem in Higher Education
4.1 INTRODUCTION The productivity, cost, and quality data in Chapter 2 reveal faculty/staff productivity declined steadily while real wages increased after 1980 and, as the simple algebra of productivity/cost suggests, real cost per student rose briskly. Further, the data suggest quality has declined. These relationships are an economic anomaly, since increases in productivity are normally a prerequisite for increases in real wages in the rest of the economy. Faculty members, administrators, and governing boards are stewards of the intergenerational social contract: adults subsidize college with the understanding students will pass that subsidy on to the next generation. Faculty members, administrators, and governing boards are obligated to insure the cost is reasonable and quality is maintained. If the costs are not reasonable or quality declines, the social contract will fail. The ultimate responsibility for preserving the higher education social contract rests on governing boards; they are the leading stewards. Administrators and governing boards set policy. Why have they failed to take the obvious steps needed to control cost? The front runners in the contest for “highest cost sector in the U.S. economy” are higher education and health care. Both of these sectors are dependent on third party payers: insurance/taxpayers in health care and parents/donors/taxpayers in higher education. They are dramatically different with respect to the productivity issue, however. Technical innovation is continuous in health care and little innovation has taken place in higher education for the past two centuries. Except for the classroom technology, Adam Smith would be familiar with what...
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