Goals of Higher Education Multiple missions Teaching Research Public service Each mission is socially valuable but privately unprofitable

Awkward Economics Non-profit enterprises Non-distribution constraint Trust industries Asymmetric information Buyer is vulnerable to seller’s opportunism Non-profit motive gives buyer confidence Education is a one-shot purchase Pursuit of excellence Fuzzy goals

Awkward Economics Customer as Input Production Technology Consumers are also outputs Peer effects Buy vs. create an education Hierarchy matters Sales maximization may not be desirable Restricted admissions

Higher Education as Business Consumerism Institutions serves the interests of various groups (i.e. customers) Students Corporations Offer products to attract students Rec. Centers, dorms, winning football teams Offer products to attract corporations Research, trained students

Other Finance Theories Baumol’s Cost Disease Economic theory predicts that wages rise as labor productivity increases – tied closely together Labor productivity has been stagnant (or difficult to improve) in fields such as education and the arts Faculty to student ratios remain relatively constant It is difficult to substitute labor for capital in these fields due to increasing wages paid in other fields Thus, prices will rise faster than inflation in these fields.

Other Finance Theories Bowen’s revenue theory of cost “The unit cost of education is determined by the amount of revenues currently available for education relative to enrollment” The cost of education is directly determined by how much revenue is available to create that education. Non-profit status is key to this theory Prestige maximizers Students as consumers Illustrated in the next slide

Delta Cost Project – Trends in College SpendingTrends in College Spending

Small Group Discussion For the following organizations on campus: 1. Enrollment Management 2. Residence Life 3. Athletic Department 4. MU Libraries 5. MU Hospitals and Clinics What are the stated goals of the organization? How do they contribute to the overall mission of the university? How do they generate their revenues? Do they act more like a non-profit or profit-making firm?

Small/Large Discussion Question On Monday, Sweet Briar College announced to stakeholders that the college will cease to exist after this coming summer session despite an $85 million endowment. How can higher education finance theories explain the choice of Sweet Briar College to close?

Small/Large Discussion Question Describe why the customer-input technology and peer quality discussions are important for the following sectors of higher education: 1. Public community colleges 2. For-profit colleges 3. Historically Black colleges and universities 4. Public Master’s granting universities (open access) 5. Public liberal arts universities

Small/Large Discussion Question How does the business model of higher education directly support in fulfilling the mission of an educational institution? 1. How is it different for elite and non-elite universities? 2. How is it different for non-profit and for-profit universities?

Small/Large Discussion Question To account for cost disease that permeates higher education, Weisbrod, Ballou, and Asch (2008) note that competition among comparable institutions for revenue is on the rise (p. 34). Does this increased competition move some higher education institution missions closer to the academic market than others?

Small/Large Discussion Question What changes can we make to the current managerial objectives that would return higher education to better serve its founding purpose?