Abstract
A stochastic cost frontier with inefficiency effects is estimated to investigate the impacts of decreases in state funding support on the operating efficiency of public colleges and universities in the U.S. Panel data for 378 institutions spanning 10 academic years, 2004 through 2013, captures the efficiency effects of declines in state funding from 32 % to 23 %. There are several improvements over early work of like kind that was, however, confined to four academic years, 2005 through 2008, and could not account for the accelerated effects of state funding decreases that followed the financial crisis. Inefficiency effects are extended to include both private giving as a substitute revenue source and federally funded Pell Grants. Empirical results are robust and support the notion that government does matter. Decreases in state funding create inefficiency in producing public higher education. Results also suggest the same for private giving and Pell Grant support, although the former was statistically weak at best. On the cost side, the results, not surprisingly, indicate that university administrators held costs down with hiring increases in non-tenure track faculty and staff relative to tenure track and tenured faculty.
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Notes
In the present study, the government effect is isolated to include only state funding whereas Sav (2012a) employed the composite variable of state, local, and federal funding. The rationale is to account for the effects of the large declines in state support given that local and federal funding has remained substantially stable (GAO, 2014) over the time period used here. Sav (2012a) also evaluates private universities, whereas the focus here is purely on the public side.
As a customary matter, hereafter “university” is used to represent all named colleges and universities included in the sample.
The literature search produced a non-parametric evaluation of public funding effects on the efficiency of Bulgarian universities (Tochkov et al. 2012). While that system is of unfamiliar territory, the study concludes that “there are some indications that institutions with lower efficiency rankings are the recipients of a larger subsidy.” That conclusion is counter to the present findings for the U.S. system, but as best one can tell “some indications” are based on statistically insignificant results. The search did not produce any comparable studies among the emerging parametric stochastic frontier studies. Thus, given that this paper revisits the earlier study by Sav (2012a), a literature recap in the main text was believed to be unnecessary. Readers can revisit that paper for a literature overview.
Given this revisit, the presentation of the empirical methodology is abbreviated. However, the unrestricted translog model is used here, whereas Sav (2012a) employed the Cobb-Douglas model. In preliminary work, the latter was estimated and the likelihood ratio test rejected it over the translog. Thus, the choice was statistically necessary and could easily be attributed to the necessary changes in cost determinants, the expansion of the inefficiency term factors, as well as, the increase in the panel data.
It is possible that the weakness of the GIFT estimate occurs as a result of private giving interacting with STATE. Sav (2010) presents empirical evidence of state government’s free ride. Private giving reduces, i.e., crowds out, public funding of public colleges and universities at the rate of 43 cents on the dollar.
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Sav, G.T. Declining State Funding and Efficiency Effects on Public Higher Education: Government Really Does Matter. Int Adv Econ Res 22, 397–408 (2016). https://doi.org/10.1007/s11294-016-9602-z
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DOI: https://doi.org/10.1007/s11294-016-9602-z