In summary, we have characterized the academic department at a university as a non-profit faculty collective that engages in the ‘production’ of large profitable introductory classes in order to finance its ‘consumption’ of bright advanced students in small classes, as well as research. The implications of this model help to answer a number of questions regarding institutional behavior in higher education, including the following:
Why do people make donations of discretionary resources to universities, despite the economist's expectation that fixed costs or revenues (i.e., costs and revenues that are not tied to specific activities) will not influence behavior?
Why are faculty members paid less than people with comparable training in government or private industry?
Why is a large proportion of faculty time devoted to research, even where this is not separately funded?
Why do we observe huge cost variations across institutions, even when level and discipline are held constant?
Why is undergraduate education carried out in a more cost-intensive way at colleges than at universities?
Why are graduate training and research (G and R) (almost) always found in conjunction with undergraduate education (U), while U is often found without G and R?
Why is non-price rationing used extensively by academic institutions?
Why do universities typically face a pressure for departmental expansion, a perpetual need for ‘more’ resources?
Why do elaborate recruitment mechanisms, probationary periods with value indoctrination, segmented and committee decision-making prevail in academia?
How can the theory of the labor-managed firm help explain the prevalence of tenure and uniform teaching loads at universities?
This has been primarily an exercise in positive analysis; in a more normative approach to the subject we would have to specify the criteria for evaluation and the viewpoint we were adopting — that of students, faculty, university administrators and taxpayers. As we have seen above, there may well be conflicts among all of these interests so the assignment of decision-making power also implies an assignment of property rights and real income which, therefore, influences resource allocation. Potential sources of divergent interests between the department and the broader university of which it is one component, are explored in the Appendix.
In comparing the output levels of the non-profit collective such as an academic department, with that in the competitive PMO or the Illyrian firm, we have found that some goods (e.g., graduate education and research) will be ‘overproduced’ by the NPO, way beyond the point where total or per capita profits are maximized, because of the positive utility which they yield, often on a ‘collective goods’ basis, to the NPO managers. On the other hand, profitable products that yield negative utility will be ‘underproduced’ relative to the PMO and (as in the Illyrian firm but for a different reason) may have a backward-bending supply curve and an unstable equilibrium. This may be the case for undergraduate instruction. Attempts to increase the quantity of such products by increasing lump sum revenues or price may actually have a contrary effect.
We have also found that input-output relationships or total and marginal costs of each product, may be treated as choice variables, entering into the objective function, rather than as exogenously determined technological constraints. Moreover, interdependencies among activities exist for a multi-product NPO such as an academic department, even if production and demand functions are completely separable.
In general, since the choice of product mix and factor mix depends on subjective utility functions of the faculty-managers, these may vary from one department to another and the response to parametric changes may also vary. This means that the central administration at the university or the state planner overseeing it is clearly limited in his ability to influence resource allocation when decisions about product and factor mix are in the hands of the departmental non-profit collective. If the planner wishes to achieve his ends by manipulating the incentive structure facing the department, rather than by direct controls, he must first understand which activities are regarded by the faculty-managers as production, which are utility-yielding consumption, and which are a mixture of production and negative consumption. The group decision process, cycling possibilities, and monitoring and enforcement impediments further complicate the situation. Unless he is aware of these difficulties, he may find income effects, backward-bending supply curves, nonzero cross elasticities, intransitivities and free-rider problems that were not predicted by the traditional theory of the firm and that may yield an input-output mix which differs from his expectations or intent.
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James, E., Neuberger, E. The university department as a non-profit labor cooperative. Public Choice 36, 585–612 (1981). https://doi.org/10.1007/BF00128741