Measuring Baumol and Bowen Effects in Public Research Universities

That is a new paper by Robert E. Martin and R. Carter Hill:

We estimate three models of cost per student using data from Carnegie I and II public research universities. There are 841 usable observations covering the period from 1987 to 2008. We find that staffing ratios are individually and collectively significant in each model. Further, we find evidence that shared governance lowers cost and that the optimal staffing ratio is approximately three tenure track faculty members for every one full time administrator. Costs are higher if the ratio is higher or lower than three to one. As of 2008 the number of full time administrators is almost double the number of tenure track faculty. Using the differential method and the coefficients estimated in the three models, we deconstruct the real cost changes per student between 1987 and 2008 into Baumol and Bowen effects. This analysis reveals that for every $1 in Baumol cost effects there are over $2 in Bowen cost effects. Taken together, these results suggest two thirds of the real cost changes between 1987 and 2008 are due to weak shared governance and serious agency problems among administrators and boards.

For the pointer I thank Michael Tamada (who does not necessarily endorse the argument).