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.

Glossary

Robert E. Martin

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

Extract

Academic ratchet – new activities in higher education add to permanently higher costs and to a commitment to fund increases in those activities in the future; the costs ratchet up and never come back down through the abandonment of obsolete activities. Adverse selection – when information is not symmetrically distributed (asymmetric information), market prices can adversely sort for low quality; high interest rates adversely select for low quality borrowers and the buyer’s lack of information about product quality results in a premium being paid to low quality providers and discounts below cost for high quality products. This drives the high quality product out of the market; it adversely selects for low quality products. Asymmetric information – when the information available to each party in a transaction is not uniform, one or more parties in the transaction has more information than the other parties. The more informed party has an economic advantage. Bundling – combining multiple goods or services and selling them as a package. Bundling products/services reduces customer choice, enables price discrimination, and acts as a barrier to entry for firms that cannot bundle products. Bundling can have a positive social impact when there are economies in production or consumption. Cash flows – every institution, private, public, or government, has cash inflows and cash outflows that have to be managed in order to avoid chronic unfunded deficits. Managers must resolve differences in the timing of inflows/outflows and insure that debt obligations are met. Centrifugal randomness – in expenditures and staffing employed among similar higher education institutions....