The economics of higher non-profit and for-profit education

Here is a 2009 paper of mine with Sam Papenfuss (pdf), a later version of which was published in this book edited by Joshua Hall.  The paper deliberately sidesteps the recent scandals and focuses on fundamentalist explanations of why higher education might be provided on a non-profit or for-profit basis.

The key stylized facts are this:

Two primary features characterize the observed educational for-profits. First, for-profits tend to specialize in highly practical or vocational forms of training. For-profits are especially prominent in areas where student performance can be measured by a relatively objective, standardized test. Nonprofits, in contrast, have a stronger presence in the liberal arts, although they are by no means restricted to that arena..

This is a general pattern, and not unique to the United States today:

A comparison of for-profit and non-profit institutions in the Philippines [in the 1970s] bears out many of the differences noted above. Filipino for-profits tend to charge lower fees, specialize in education of lower academic reputation, spend less on capital equipment, and serve students who plan on pursuing vocational careers or taking a standardized vocational test upon graduation…Students at for-profits are approximately ten times more likely to take the tests. Adjusting for the lower pass rate from for-profits, the for-profits are putting about five times the number of students through the tests as the non-profits, even though for-profits educated no more than three-fifths of all Filipino students at the time.

Here is one possible (partial) resolution:

Faculty governance implies that for-profits and nonprofits place different relative weight on reputation and profits. The for-profit selects students and faculty on the basis of how easily their reputational benefits can be captured by shareholders, whereas the non-profit places greater weight on the reputational benefits that are kept by faculty. The for-profit pursues “reputation as valued by students in dollar terms” and the nonprofit pursues “reputation with the external world,” or “reputation as a public good.” In the resulting equilibrium, for-profits achieve lower status.

…The hypothesis therefore predicts a segmented market for higher education. Students who seek the highest levels of certification and reputation will attend non-profit institutions, which are run by faculty and use their prestige to raise donations. Students whose quality can be certified by an outside vocational exam do not need the non-profit reputational endorsement. They will pursue the more efficient instruction offered by for-profits.

There is a good recent paper by David Deming, Claudia Goldin, and Lawrence F. Katz on educational for-profits, available here.  Here is a 2010 Dick Vedder piece on for-profits, more positive than most recent accounts.


Comments for this post are closed