Cost Control, College Access, and Competition in Higher Education (review)

Robert Martin's new book is an ambitious undertaking. He presents an integrated model of a higher education institution using economic theory, which is no trivial task given the multiple missions and dispersed decision making that occur within colleges and universities. Furthermore, he uses this model, in combination with empirical evidence, to discuss how poor cost control and competition across schools have affected students' access to higher education, an important topic that has been insufficiently examined in the academic literature to date. While the scope of the book does not allow for full treatment of all issues covered, it produces some important insights and should stimulate future research in these areas.

Unlike academics, federal and state policymakers have focused extensively on cost-control issues in higher education, often as justification for reduced funding and greater oversight. Martin also argues that institutions do a poor job of controlling costs, mostly because of agency problems that allow the administration and/or the faculty to award themselves better working conditions at the expense of students. Because he views substantial public investment in higher education as vital for future economic growth, he laments the impact of rising college costs on voters' willingness to fund higher education.

Policymakers pay much less attention to how competition among schools affects costs and usually assume that increased competition will reduce costs and increase educational quality. Martin's analysis suggests that competition may not always lead to these outcomes. Extensive recruiting efforts and "academic branding" campaigns undertaken to attract students from competing schools can result in little change in educational quality and substantial increases in costs. Furthermore, the distribution of subsidies across students can be altered, because increased competition hinders institutional efforts to provide larger subsidies to low-income students.

Although some new empirical findings are presented, most notably some interesting Granger causality tests of the budgetary slack models suggested by Howard Bowen (1980) and Ronald Ehrenberg (2000), this book's primary contribution is theoretical. Chapter 5 contains the most useful theoretical results. A discussion of tuition discounting produces several interesting propositions and provides a solid base for future research. The discussion of institutional capacity is even more insightful. By carefully distinguishing between short-term and long-term outcomes, Martin debunks the conventional wisdom that enrollment growth is self-financing. While enrollment growth can lead to short-term improvements in the financial health of an institution, quality will decline in the long term unless external revenues are generated to fund the necessary increases in capacity.

Martin's theoretical model uses standard economic theory, which in the past has been more effectively applied to for-profit institutions than to institutions of higher education. That is, standard economic theory relies upon maximization models where institutions have clearly stated objectives, but institutions of higher education have multiple objectives, and no obvious metric exists for many of them. Consequently, the common approach in the literature is to simply assume that colleges and universities maximize academic prestige. Martin follows this general framework but adjusts it slightly by explicitly assuming that academic prestige and quality reputation are equivalent, and by implicitly assuming throughout most of the analysis that quality reputation is primarily determined, in the long run, by alumni success.

This last assumption is crucial because the inclusion of alumni success in the objective function provides an institution with a strong incentive to provide a quality education to its future alumni. Given the importance of the assumption, one wishes that Martin had included an extensive discussion justifying it. Alumni success should be very influential in determining reputation if this outcome is observable, but how would prospective students and donors obtain this information? The incoming academic credentials of past classes and the research productivity of the faculty, while less relevant to a prospective student, would be much easier to observe.

Although Martin seeks to present a model of the representative higher education institution, the extreme differences between research universities, liberal arts...