Abstract
In this chapter, we look at the revenues and expenditures for postsecondary institutions. As in prior chapters, we begin this chapter by providing some background information on the early work that economists have done to examine organizational finances, and its eventual application to colleges and universities. We then turn to the ways in which economists analyze revenues for organizations, and how this relates to the revenues that are received by colleges and universities. Building on Chap. 5, we highlight the important role that subsidies play in funding the operations of institutions of higher education. From there, we examine the expenditure side of the ledger and how economists look at the cost structure for organizations and how this relates to colleges and universities. In the extension to this model, we focus on how some institutions assign revenues and costs to academic units within the institution using what is referred to as a decentralized budgeting process. Finally, we conclude the chapter with a policy discussion of decisions to close or merge postsecondary institutions and the connection to finances.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
- 2.
Throughout this chapter, we use the terms “expenditure” and “cost” interchangeably to refer to the monies spent by postsecondary institutions for the delivery of services. These terms should not be confused with the costs/expenditures incurred by students and their families to go to college, nor the cost/expenditures of federal and state governments to help support higher education.
- 3.
Early discussions of supply can be found in the work of Adam Smith (1776). Cournot (1838) is credited with being the first to introduce a supply curve to represent the schedule of quantities of output that would be supplied at different prices. The supply curve was later enhanced by Rau (1841) and most notably Mangoldt (1863). An excellent analysis of the history of supply curves can be found in Humphrey (1996).
- 4.
- 5.
- 6.
Among the first economic studies of the non-profit sector was the Newhouse’s (1969) study of hospitals. Additional studies of note in the economic literature on not-for-profit organizations include Hansmann (1987), Weisbrod (2009), James (1983), Steinberg and Gray (1993), P. Hall (1987), Steinberg (2003), and Easley and O’Hara (1983).
- 7.
Details on the 2005 Carnegie classifications of postsecondary institution can be found at http://classifications.carnegiefoundation.org/resources/.
- 8.
A complicating factor in pinning down the total amount paid by students and their families is that they pay directly for services through their tuition and fees, and also indirectly as taxpayers whose payments are used by governments to support postsecondary education. They may also make charitable donations to the institution, and consume other postsecondary services.
- 9.
Of course there are exceptions to this rule. Some companies in the for-profit world receive subsidies from the government, for example, as a means to help make them more competitive with international competitors (e.g., automakers) or to ensure the survival of the industry.
- 10.
The reporting standards for public institutions are determined by the Governmental Accounting Standards Board (GASB, http://www.gasb.org), and the standards for private institutions are under the jurisdiction of the Financial Accounting Standards Board (FASB, http://www.fasb.org). Institutions are required to report financial data by designated categories to the federal government annually through the Integrated Postsecondary Education Data System (IPEDS). Details on the revenue categories can be found at: http://www.nces.ed.gov/IPEDS/.
- 11.
Many studies in economics and political science rely on the median voter model to explain legislative behavior (see, for example, Comanor, 1976; Ahmed & Greene, 2000; Holcombe, 1989). Median voter theory posits that legislators vote in accordance with the preferences of the average, or median, voter within their jurisdiction. The model can be traced back to the work of Hotelling (1929), Black (1948), and Downs (1957). Studies of the median voter model applied to education include Borcherding and Deacon (1972), Lovell (1978), Bergstrom, Rubinfeld, and Shapiro (1982), Holcombe (1980), Toutkoushian and Hollis (1998), and Corcoran and Evans (2010). Alternatively, some researchers have relied on competing interest group theory (G. Becker, 1983, 1985) to explain how the size of groups such as senior citizens and corrections have a disproportionate influence on the behavior of legislators.
- 12.
Much of the literature on charitable giving has focused on whether public subsidies discourage or crowd out private giving to organizations. Studies of note that have examined the determinants of donations include Bergstrom, Blume, and Varian (1986), Okten and Weisbrod (2000), Payne (2001), Cheslock and Gianneschi (2008), Gottfried (2008), and Heutel (2014).
- 13.
Source: Digest of Education Statistics 2012, Table 411.
- 14.
Brown, Dimmock, and Weisbenner (2015) studied the effects of both supply-side and demand-side factors on charitable donations to institutions of higher education. In addition, their study focused on the years before and during the Great Recession of the late 2000s. As part of their study, they examined the effects of the business cycle and fluctuations in the health of the economy on charitable donations to institutions of higher education.
- 15.
- 16.
The Higher Education Price Index (HEPI) was developed by Ken Halstead as a way to track changes in the cost of delivering higher education services (Halstead, 1991). The HEPI is based on the average prices in a market basket of goods and services that are typically purchased by institutions of higher education each year. Some of the items in the market basket are personnel compensation, fringe benefits, utilities, supplies and materials, contracted services such as data processing, library acquisitions, and other items purchased for current operations. The index is explained and maintained by the Commonfund Institute (https://www.commonfund.org/CommonfundInstitute/HEPI/Pages/default.aspx).
- 17.
The cost disease argument can be traced back to Baumol and W. Bowen (1966). They initially applied the idea to a string quartet, arguing that the production of this service requires a certain amount of labor inputs for which substitutes cannot be easily found. In subsequent work, Baumol and others have applied this notion to education and debated whether or not it is appropriate (Baumol & Blackman, 1995; Baumol, 1996; W. Bowen, 2013; Cowen, 1996; Wellman, 2010; Martin, 2011).
- 18.
Technically, the “not-for-profit” status of an institution means that the college or university may not distribute excess revenues to shareholders as a for-profit firm or organization would do (Hansmann, 1986). There are other reasons why revenues may exceed expenditures for not-for-profit institutions. The expenditures reported to the federal government through the annual IPEDS collection rely on GASB reporting rules, which may not cover all relevant spending in a given year. Other expenses and revenues may be carried over from one year to the next, which adds additional variation to reported financial data.
- 19.
More detailed descriptions of the various expenditure categories can be found on the NCES website for IPEDS.
- 20.
- 21.
- 22.
In the translog production function (see, for example deGroot, McMahon, & Volkwein, 1991), the log of total cost is regressed against the log of outputs, log of squared outputs, and the interactions of log of outputs with each other.
- 23.
The flexible fixed cost function draws on the pioneering work of Baumol, Panzar, and Willig (1982). Studies of note that have used this approach in higher education applications include Cohn, Rhine, and Santos (1989), Koshal and Koshal (1995, 1999), and Laband and Lentz (2003). Interestingly, some of the flexible fixed cost studies that have received attention in the literature (e.g., Cohn et al., 1989; Koshal & Koshal, 1999; Laband & Lentz, 2003; Sav, 2004) used a quadratic total cost function. As noted by Laband and Lentz (2004, p.434): “To represent the classic textbook cost function that can show (dis)economies of scale, we estimated a total cost function that included squared and cubic measures of the three outputs in the model.” Other studies of note include Getz, Siegfried, and Zhang (1991), James (1978), and Lenton (2008).
- 24.
These relationships have been consistently demonstrated by economists as a result of estimating cost functions, as described in a previous section of this chapter. For example, Paulsen (1989) estimated the coefficients of instructional cost functions for small private, not-for-profit colleges, finding that many of these same factors create differences in instructional costs even at small private colleges. More specifically, results indicated that instructional costs were greater for upper-level undergraduates compared to lower-level undergraduates, for graduate students relative to undergraduate students; and instructional costs were directly affected by differences in faculty salaries as well as differences in student-faculty ratios.
- 25.
- 26.
Indiana University is often credited with being the first public institution to adopt a decentralized budgeting approach (Whalen, 1991). Other academics who have contributed to the study and analysis of decentralized budgeting systems include Brinkman (1993), Priest, Becker, Hossler, and St. John (2002), Strauss and Curry (2002), Strauss, Curry, and Whalen (1996), Toutkoushian and Danielson (2002), Hearn, Lewis, Kallsen, Holdsworth, and Jones (2006), Massy (1996), and Lopez (2006).
- 27.
- 28.
The survey was conducted by Inside Higher Education and can be downloaded from their website at https://www.insidehighered.com/system/files/media/IHE_Business%20Officers_Survey%202015%20final.pdf
- 29.
See the NCES report by Ginder, Kelly-Reid, and Mann (2015) for more details and statistics.
- 30.
Studies of note on the factors that influence campus closings include Hoenack and Roemer (1981) and Porter and Ramirez (2009). A list of college closings in recent years can be found at http://www.ehow.com/info_7965391_list-closed-universities.html.
References
Ahmed, S., & Greene, K. (2000). Is the median voter a clear-cut winner?: Comparing the median voter theory and competing theories in explaining local government spending. Public Choice, 105, 207–230.
Arrow, K. (1969). The organization of economic activity: Issues pertinent to the choice of market versus nonmarket allocation. The Analysis and Evaluation of Public Expenditure: The PPB System, 1, 59–73.
Bailey, M. (1954). Price and output determination by a firm selling related products. American Economic Review, 44, 82–93.
Baumol, W. (1996). Children of performing arts, the economic dilemma: The climbing costs of health care and education. Journal of Cultural Economics, 20, 183–206.
Baumol, W., & Blackman, S. (1995). How to think about rising college costs. Planning for Higher Education, 23, 1–7.
Baumol, W., & Bowen, W. (1966). Performing arts: The economic dilemma. New York: Twentieth Century Fund.
Baumol, W., Panzar, J., & Willig, D. (1982). Contestable markets and the theory of industry structure. New York: Harcourt and Brace Jovanovich.
Becker, G. (1983). A theory of competition among pressure groups for political influence. The Quarterly Journal of Economics, 98, 371–400.
Becker, G. (1985). Public policies, pressure groups, and dead weight costs. Journal of Public Economics, 28, 329–347.
Bergstrom, T., Blume, L., & Varian, H. (1986). On the private provision of public goods. Journal of Public Economics, 29, 25–49.
Bergstrom, T., Rubinfeld, D., & Shapiro, P. (1982). Micro-based estimates of demand functions for local school expenditures. Econometrica, 50, 1183–1205.
Berle, A., & Means, G. (1933). The modern corporation and private property. New York: Macmillan.
Black, D. (1948). On the rationale of group decision-making. Journal of Political Economy, 56, 23–34.
Borcherding, T., & Deacon, R. (1972). The demand for the services of non-federal governments. The American Economic Review, 62, 891–901.
Bowen, H. (1980). The costs of higher education. San Francisco: Jossey-Bass Publishers.
Bowen, W. (2013). Higher education in the digital age. Princeton, NJ: Princeton University Press.
Brinkman, P. (1990). Higher education cost functions. In S. Hoenack & E. Collins (Eds.), The economics of American universities: Management, operations, and fiscal environment. New York: State University of New York Press.
Brinkman, P. (1993). Responsibility center budgeting: An approach to decentralized management for institutions of higher education. Planning for Higher Education, 21, 49–51.
Brinkman, P., & Leslie, L. (1986). Economies of scale in higher education: Sixty years of research. Review of Higher Education, 10, 1–28.
Brown, J., Dimmock, S., & Weisbenner, S. (2015). The supply of and demand for charitable donations to higher education. In J. Brown & C. Hoxby (Eds.), How the financial crisis and Great Recession affected higher education. Chicago: The University of Chicago Press.
Cheslock, J., & Gianneschi, M. (2008). Replacing state appropriations with alternative revenue sources: The case of voluntary support. The Journal of Higher Education, 79, 208–229.
Clemens, E. (1951–52). Price discrimination and the multi-product firm. Review of Economic Studies, 19, 1–11.
Clotfelter, C. (1996). Buying the best: Cost escalation in elite higher education. Princeton, NJ: Princeton University Press.
Coase, R. (1937). The nature of the firm. Economica, 4, 386–405.
Cohn, E., Rhine, S., & Santos, M. (1989). Institutions of higher education as multi-product firms: Economies of scale and scope. The Review of Economics and Statistics, 71, 284–290.
College Board. (2014). Trends in college pricing 2013. Washington, DC: The College Board. Retrieved 8/1/14, from http://www.trends.collegeboard.org
Comanor, W. (1976). The median voter rule and the theory of political choice. Journal of Public Economics, 5, 169–177.
Corcoran, S., & Evans, W. (2010). Income inequality, the median voter, and the support for public education (No. w16097). Cambridge, MA: National Bureau of Economic Research.
Cournot, A. (1838). Researches into the mathematical principles of the theory of wealth (N. Bacon, Trans.). New York: Macmillan, 1929.
Cowen, T. (1996). Why I do not believe in the cost-disease. Journal of Cultural Economics, 20, 207–214.
deGroot, H., McMahon, W., & Volkwein, J. (1991). The cost structure of American research universities. The Review of Economics and Statistics, 73, 424–431.
Downs, A. (1957). An economic theory of democracy. New York: Harper Collins.
Easley, D., & O’Hara, M. (1983). The economic role of the nonprofit firm. The Bell Journal of Economics, 14, 531–538.
Ehrenberg, R. (Ed.). (2006). What’s happening to public higher education? The shifting financial burden. Baltimore: The Johns Hopkins University Press.
Ferguson, C. (1969). The neoclassical theory of production & distribution. London: Cambridge University Press.
Getz, M., Siegfried, J., & Zhang, H. (1991). Estimating economies of scale in higher education. Economics Letters, 37, 203–208.
Ginder, S., Kelly-Reid, J., & Mann, F. (2015). Postsecondary institutions and cost of attendance in 2014–15; degrees and other awards conferred, 2013–14; and 12-month enrollment, 2013–14 (NCES 2015–097). Washington, DC: National Center for Education Statistics, Institute of Education Sciences.
Gottfried, M. (2008). College crowd-in: How private donations positively affect alumni giving. International Journal of Educational Advancement, 8, 51–70.
Grossman, S., & Hart, O. (1983). An analysis of the principal-agent problem. Econometrica, 51, 7–45.
Hall, P. (1987). A historical overview of the private nonprofit sector. In W. Powell (Ed.), The nonprofit sector: A research handbook (pp. 341–361). New Haven, CT: Yale University Press.
Hall, R., & Hitch, C. (1939). Price theory and business behavior. Oxford Economic Papers, 2, 12–45.
Halstead, K. (1991). Higher education revenues and expenditures: A study of institutional costs. Washington, DC: Research Associates of Washington.
Hansmann, H. (1987). Economic theories of nonprofit organization. In W. Powell (Ed.), The nonprofit sector: A research handbook (pp. 27–42). New Haven, CT: Yale University Press.
Hansmann, H. (1986). The role of nonprofit enterprise. In S. Rose-Ackerman (Ed.), The economics of nonprofit institutions (pp. 57–84). New York: Oxford University Press.
Harris, M., & Raviv, A. (1978). Some results on incentive contracts with applications to education and employment, health insurance, and law enforcement. The American Economic Review, 68, 20–30.
Hearn, J., Lewis, D., Kallsen, L., Holdsworth, J., & Jones, L. (2006). “Incentives for Managed Growth”: A case study of incentives-based planning and budgeting in a large public research university. The Journal of Higher Education, 77, 286–316.
Heutel, G. (2014). Crowding out and crowding in of private donations and government grants. Public Finance Review, 42, 143–175.
Hicks, J. (1946). Value and capital (2nd ed.). Oxford: Oxford University Press.
Hoenack, S., & Roemer, J. (1981). Evaluating college campus closings for the 1980s: A case application of an optimization model. Research in Higher Education, 15, 49–68.
Holcombe, R. (1980). An empirical test of the median voter model. Economic Inquiry, 18, 260–275.
Holcombe, R. (1989). The median voter model in public choice theory. Public Choice, 61, 115–125.
Hotelling, H. (1929). Stability in competition. The Economic Journal, 39, 41–57.
Humphrey, T. (1996). Marshallian cross diagrams and their uses before Alfred Marshall: The origins of supply and demand geometry. In J. Woord (Ed.), Alfred Marshall: Critical assessments. Second series. New York: Routledge.
James, E. (1978). Product mix and cost disaggregation: A reinterpretation of the economics of higher education. Journal of Human Resources, 13, 157–186.
James, E. (1983). How nonprofits grow: A model. Journal of Policy Analysis and Management, 2, 350–365.
Koshal, R., & Koshal, M. (1995). Quality and economies of scale in higher education. Applied Economics, 27, 773–778.
Koshal, R., & Koshal, M. (1999). Economies of scale and scope in higher education: A case of comprehensive universities. Economics of Education Review, 18, 269–277.
Kroszner, R., & Putterman, L. (Eds.). (2009). The economic nature of the firm: A reader (3rd ed.). Cambridge, UK: Cambridge University Press.
Laband, D., & Lentz, B. (2003). New estimates of economies of scale and scope in higher education. Southern Economic Journal, 70, 172–183.
Laband, D., & Lentz, B. (2004). Do costs differ between for-profit and not-for-profit producers of higher education? Research in Higher Education, 45, 429–441.
Lane, J., & Kivisto, J. (2008). Interests, information, and incentives in higher education: Principal-agent theory and its potential applications to the study of higher education governance. In Higher education: Handbook of theory and research (Vol. 23, pp. 141–179). Dordrecht, The Netherlands: Springer.
Lenton, P. (2008). The cost structure of higher education in further education colleges in England. Economics of Education Review, 27, 471–482.
Liefner, I. (2003). Funding, resource allocation, and performance in higher education systems. Higher Education, 46, 469–489.
López, M. (2006). Towards decentralized and goal-oriented models of institutional resource allocation: The Spanish case. Higher Education, 51, 589–617.
Lovell, M. (1978). Spending for education: The exercise of public choice. The Review of Economics and Statistics, 60, 487–495.
Mangoldt, H. (1863). The exchange ratio of goods. (E. Henderson, Trans.) Grundriss der volkswirtschaftslehre, Stuttgart: Engelhorn. In International economic papers, No. 11, (pp. 32–59). London: Macmillan, 1962.
Marshall, A. (1890). Principles of economics (Vol. 1). London: Macmillan.
Martin, R. (2011). The college cost disease: Higher cost and lower quality. Northampton, MA: Edward Elgar Publishing.
Massy, W. (Ed.). (1996). Resource allocation in higher education. Ann Arbor, MI: University of Michigan Press.
McBride, A., Neiman, S., & Johnson, J. (2000). Responsibility-centered management: A 10-year nursing assessment. Journal of Professional Nursing, 16, 201–209.
McPherson, M., Schapiro, M., & Winston, G. (1993). Paying the piper: Productivity, incentives, and financing in U.S. higher education. Ann Arbor, MI: The University of Michigan Press.
Moore, F. (1959). Economies of scale: Some statistical evidence. Quarterly Journal of Economics, 73, 232–245.
Moss, S. (1984). The history of the theory of the firm from Marshall to Robinson and Chamberlin: The source of positivism in economics. Economica, 51, 307–318.
National Center for Education Statistics. (2012). Digest of education statistics 2012. Washington, DC: Institute of Education Sciences.
Newhouse, J. (1969). Toward a theory of non-profit institutions: An economic model of a hospital (No. RAND-P-4022). Santa Monica, CA: RAND Corporation.
Okten, C., & Weisbrod, B. (2000). Determinants of donations in private nonprofit markets. Journal of Public Economics, 75, 255–272.
Panzar, J., & Willig, R. (1977). Economies of scale in multi-output production. The Quarterly Journal of Economics, 91, 481–493.
Paulsen, M. (1989). Estimating instructional cost functions at small independent colleges. Journal of Education Finance, 15, 53–66.
Paulsen, M., & Smart, J. (Eds.). (2001). The finance of higher education: Theory, research, policy & practice. New York: Agathon Press.
Payne, A. (2001). Measuring the effect of federal research funding on private donations at research universities: Is federal research funding more than a substitute for private donations? International Tax and Public Finance, 8, 731–751.
Pfouts, R. (1961). The theory of cost and production in the multi-product firm. Econometrica, 29, 650–658.
Porter, S., & Ramirez, T. (2009). Why do colleges fail? An analysis of college and university closings and mergers, 1975–2005. Paper presented at the meeting of the American Educational Research Association, San Diego, CA.
Priest, D., Becker, W., Hossler, D., & St. John, E. (Eds.). (2002). Incentive-based budgeting systems in public universities. Northampton, MA: Edward Elgar.
Putterman, L. (1998). The economic nature of the firm. Cambridge, UK: Cambridge University Press.
Rau, K. (1841). Grundsätze der volkswirthschaftslehre (4th ed.). Heidelberg, Germany: C.F. Winter.
Rees, R. (1985). The theory of principal and agent part i. Bulletin of Economic Research, 37, 3–26.
Ross, S. (1973). The economic theory of agency: The principal’s problem. The American Economic Review, 63, 134–139.
Sav, G. (2004). Higher education costs and scale and scope economies. Applied Economics, 36, 607–614.
Smith, A. (1776). The wealth of nations. London: Methuen & Co., Ltd.
Steinberg, R. (2003). Economic theories of nonprofit organizations. In H. Anheier & A. Ben-Nur (Eds.), The study of nonprofit enterprise: Theories and approaches (pp. 277–309). New York: Kluwer Academic Publishers.
Steinberg, R., & Gray, B. (1993). “The role of nonprofit enterprise” in 1993: Hansmann revisited. Nonprofit and Voluntary Sector Quarterly, 22, 297–316.
Strauss, J., Curry, J., & Whalen, E. (1996). Revenue responsibility budgeting. In W. Massy (Ed.), Resource allocation in higher education (pp. 163–190). Ann Arbor, MI: University of Michigan Press.
Strauss, J., & Curry, J. (2002). Responsibility center management: Lessons from 25 years of decentralized management. National Association of College and University Business Officials, PO Box 362, Annapolis Junction, MD 20701-0362.
Teece, D. (1982). Towards an economic theory of the multiproduct firm. Journal of Economic Behavior and Organization, 3, 39–63.
Toutkoushian, R. (1999). The value of cost functions for policymaking and institutional research. Research in Higher Education, 40, 1–16.
Toutkoushian, R. (2001). Trends in revenues and expenditures in public and private higher education. In M. Paulsen & J. Smart (Eds.), The finance of higher education: Theory, research, policy & practice (pp. 11–38). New York: Agathon Press.
Toutkoushian, R., & Danielson, C. (2002). Using performance indicators to evaluate decentralized budgeting systems and institutional performance. In D. Priest, W. Becker, D. Hossler, & E. St. John (Eds.), Incentive-based budgeting systems in public universities (pp. 205–226). Northampton, MA: Edward Elgar Publishing.
Toutkoushian, R., & Hollis, P. (1998). Using panel data to examine legislative demand for higher education. Education Economics, 6, 141–157.
Weisbrod, B. (2009). The nonprofit economy. Cambridge, MA: Harvard University Press.
Weisbrod, B., Ballou, J., & Asch, E. (2008). Mission and money: Understanding the university. Cambridge, MA: Cambridge University Press.
Weldon, J. (1948). The multi-product firm. Canadian Journal of Economics and Political Science, 14, 176–190.
Wellman, J. (2010). Improving data to tackle the higher education “cost disease”. Planning for Higher Education, 38, 25–37.
Whalen, E. (1991). Responsibility center budgeting: An approach to decentralized management for institutions of higher education. Bloomington, IN: Indiana University Press.
Williamson, O. (1971). Profit, growth and sales maximization. In G. Archibald (Ed.), The theory of the firm. London: Penguin.
Winston, G. (1997). Why can’t a college be more like a firm? Change, 29, 32–38.
Winston, G. (1999). Subsidies, hierarchy and peers: The awkward economics of higher education. The Journal of Economic Perspectives, 13, 13–36.
Author information
Authors and Affiliations
Glossary
Glossary
Symbol | Definition |
|---|---|
TR | Total revenue |
P k | Price of k-th higher education output |
Q k | Quantity of k-th higher education output |
G | Government subsidy to higher education |
AR | Average revenue |
MR | Marginal revenue |
\( \overline{P} \) | Average price |
\( \pi /Q \) | Profit per unit of output |
TC | Total cost |
FC | Fixed cost |
VC | Variable cost |
AC | Average cost |
AFC | Average fixed cost |
AVC | Average variable cost |
MC | Marginal cost |
f(), g() | Functions |
X | Non-output variables that affect average cost |
Z | Non-output variables that affect total cost |
AIC | Average increment in total cost |
Rights and permissions
Copyright information
© 2016 Springer Science+Business Media B.V.
About this chapter
Cite this chapter
Toutkoushian, R.K., Paulsen, M.B. (2016). Higher Education Revenues and Expenditures. In: Economics of Higher Education. Springer, Dordrecht. https://doi.org/10.1007/978-94-017-7506-9_7
Download citation
DOI: https://doi.org/10.1007/978-94-017-7506-9_7
Published:
Publisher Name: Springer, Dordrecht
Print ISBN: 978-94-017-7504-5
Online ISBN: 978-94-017-7506-9
eBook Packages: EducationEducation (R0)