1. The Economic and Social Context of US Higher Education Josef C. Brada Arizona State University 1

2. The University as a Firm What is maximized? What is produced? How is revenue obtained? Who are the customers? What are the constraints? 2

3. What is maximized? PRESTIGE Among Peers, Students, Alumni, Faculty, Employers, Government the public and the participants here 3

4. 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 4

5. 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. 5

6. Who are customers? (Stakeholders) See previous slide Plus faculty 6

7. 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 7

8. 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” 8

9. ….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. 9

10. 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 10

11. 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 11

12. 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 12

13. Other “pricing” decisions Subsidization by program of study Prestige and allocation of funds (graduate vs PhD; professional programs) 13

14. 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? 14

15. 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. 15

16. 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. 16