Abstract
For-profit higher education has grown rapidly in the United States over the last 20 years. Examples include vocational schools, technical training, in-house corporate education, the DeVry Institute, Phoenix University, and other new for-profit colleges. In addition, a number of developing countries, most prominently the Philippines, have experimented with for-profit higher education in the past. Adam Smith, writing in 1776, associated for-profit education with high levels of instructional quality, and claimed that endowed, nonprofit education resulted in shirking and poor teaching.
The analysis and conclusions expressed in this paper are those of the authors and should not be interpreted as those of the Congressional Budget Office. This paper represents independent work prior to Sam Papenfuss being employed by the Congressional Budget Office.
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Notes
- 1.
For Smith’s view, see Smith 1937 [1776], Book V, Chapter I, Articles 2d, 3d.
- 2.
Winston (1999a, b) provides a survey of issues relevant to the nonprofit status of many colleges and universities; see also Ruch (2001), Morey (2004), and Breneman et al. (2007). In economic terms, nonprofits are institutions bound by a nondistribution constraint for their profits. Nonprofits do not have owners with rights to residual income, and there are no shares which provide for both control and claims to profits. Net revenue must remain in the corporation, although some revenue will be distributed implicitly in the form of perks to managers, board members, and employees. As with for-profits, however, nonprofits must cover the costs of their operations if they are to survive and many in fact earn very high returns. Pauly (1987) provides a dissenting perspective which minimizes the practical differences between for-profit and nonprofit institutions. With regard to state and private schools, we treat the difference as one of degree, rather than kind. We view state schools run as nonprofits, but having state-appointed officials on their boards. It is not even the case that state schools necessarily receive more subsidies than their “private” counterparts; governmental subsidies provide significant portions of the budgets of schools such as Johns Hopkins and MIT.
- 3.
- 4.
- 5.
Tuition and enrollment data are taken from DeVry, Inc. 2008 Annual Report and University of Phoenix, Inc. 2008 Academic Annual Report. Winston (1999b) offers further numbers on the size of these institutions.
- 6.
For-profit colleges and universities have not disappeared in the Philippines, although they have declined in importance. Their relatively favorable legal status has dwindled over time.
- 7.
Sixto Rojas, cited in (Zwaenepoel 1975, 81). Miao (1971) and Zwaenepoel (1975) provide the two most important sources on for-profit education in the Philippines. See also Isidro and Ramos (1973). The Philippines Education Sector Study (1988) and Gonzalez (1991) provide updated information, but they offer very little treatment for the for-profit vs. nonprofit issue.
- 8.
On Turkey, see Ayse (1971); we also obtained information from Kursat Aydogan of Bilkent University.
- 9.
The model of Holtmann (1983) has the nonprofit allocate resources by queuing rather than by clientele selection. This model predicts that (noneducational) nonprofits will be low price and low quality, whereas in education we observe the nonprofits having higher quality, at least if we measure quality in terms of standard academic rankings.
- 10.
On fee differences in the Philippines, see Isidro and Ramos (1973, 269).
- 11.
- 12.
Pass rates, and the number of students who attempt the exam, differ across fields. Nonprofits show a strong relative performance for chemical engineers, physicians, nurses, dieticians, and chemists. For-profits show relative strength in producing mining engineers, mechanical engineers, architects, and pharmacists. Veterinarians and dentists, in the given sample, come exclusively from the for-profit institutions (Miao 1971, 103).
- 13.
For an interpretation of the crusade against educational for-profits based on the theory of rent-seeking, see West (1989). On rent-seeking in academia more generally, see Brennan and Tollison (1980). Winston (1999b) considers, and rejects the argument that for-profits can exploit cross-subsidies within nonprofits.
- 14.
The 10% rate applies also to bookstores, canteens, and other auxiliary operations at for-profits, although these auxiliary operations also must pay city tax, city sales tax, and real estate tax (Zwaenepoel 1975, 310–311).
- 15.
On the switching status of hospitals, and how such transformations take place, see the essays in Weisbrod (1998).
- 16.
Hansmann (1990) provides a systematic analysis of the economics of donations. Hansmann (1987, 36) hypothesizes that universities implicitly lend students money in the form of lower tuition, and expect eventual repayment in the form of subsequent donations. Krashinsky (1986, 126–127), argues that donations are a form of charity, and criticizes the idea that students donate money to a university to repay the school for previous subsidies. In the context of the performing arts, Hansmann (1981) integrates an analysis of donations with price discrimination. A symphony orchestra will set prices below market clearing, and then allocate excess demand on the basis of donations. The wealthy will be willing to make large donations to ensure that they get very good seats, access to other tickets is exchanged for smaller donations from other individuals, and so on. Other relevant pieces on the economics of nonprofits are Glaeser and Shleifer (2001) and Glaeser (2002).
- 17.
Hansmann (1980, 1987) focuses on the difficulty of monitoring the quality of teaching. Plato offered two early varieties of a trust argument for nonprofit education. He discussed the issue of for-profit education in his dialogs about the Sophists, who taught philosophy for a fee in Athens. In the dialog Protagoras, Socrates criticizes for-profit education on two grounds. First, for-profit educators will tend to praise all ideas equally, and thus will corrupt the souls of their students. Students are not yet sufficiently wise to distinguish the praise of good ideas from the praise of bad ideas, as in the argument of Hansmann. Second, education purchases are irreversible. The damage from a bad education cannot easily be undone, once a soul is corrupted. For-profit education, therefore, involves excessive risks (Plato 1954, 147–148). In modern terminology, the education market involves infrequent transactions with high per unit value. The danger of fraud tends to be especially high in such circumstances, and buyers may prefer to purchase from nonprofits. See also Brown (1992) and Ben-Ner (1986). For the trust hypothesis as applied to hospitals, see Frank and Salkever (1994). Nelson and Krashinsky (1973), in their study of day care, provide the first modern statement of the trust hypothesis. Ben-Ner (1986) focuses on the monopoly aspects of the problem, although we regard higher education as a relatively competitive sector. On this issue, see Winston (1999b).
- 18.
West (1989) raises the possibility of using outside monitors to alleviate agency problems.
- 19.
On the need for doctor monitoring in nonprofit hospitals, see Pauly and Redisch (1973). On the use of norms and sanctions to enforce internal monitoring, see Kandel and Lazear (1992). The above analysis also may help explain why high-quality universities usually combine both teaching and research. If the nonprofit has a comparative advantage at producing reputation for both students and faculty, through the enforcement of high standards, we may find both outputs produced together at the same institutions.
- 20.
- 21.
It does not matter for this hypothesis whether the university certifies the intrinsic quality of the student (consistent with signaling), or certifies how much the student has learned through study (consistent with the production of human capital).
- 22.
Rothschild and White (1995) show that a for-profit will internalize externalities across students in the form of differential tuition, but they do not show that a for-profit will pursue its reputation with nonpaying customers, as a nonprofit will. On the standards used by universities to select entering classes, see Duffy and Goldberg (1998). Hansmann (1985) argues that institutional constraints, such as feelings of camaraderie, prevent many status organizations (including schools) from charging the otherwise optimal differential entrance fees.
- 23.
Our source here is Berlitz.
- 24.
Our sources on age information are Berlitz and Strayer.
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Cowen, T., Papenfuss, S. (2010). The Economics of For-Profit Education. In: Hall, J. (eds) Doing More with Less. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-5960-7_8
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