The Cost of Producing Higher Education: An Exploration of Theory, Evidence, and Institutional Policy

Part of the Higher Education: Handbook of Theory and Research book series (HATR, volume 31)


Researchers face multiple challenges when studying the cost of producing higher education, which has led many to avoid the topic altogether. As a result, higher education scholarship provides little guidance to institutional leaders aiming to reduce costs in response to financial difficulties. To encourage greater research in this area, we review prominent cost theories, examine empirical research into costs, and explore specific policies that alter costs within colleges and universities. Our theoretical overview focuses on the cost disease, the revenue theory of costs, positional arms races, and the principal-agent problem to explain cost increases within higher education. Our discussion of empirical research is organized around Brinkman’s (Higher education cost functions. In: Hoenack SA, Collins EL (eds) The economics of American universities: management, operations, and fiscal environment. State University of New York Press, Albany, pp. 107–128, 1990) five major determinants of costs: size, scope, level of instruction, discipline, and revenues. When examining institutional policies, we discuss instructional activities and non-instructional activities separately. For instructional costs, we focus our attention on how faculty composition and instructional technology alter costs in higher education. The discussion of non-instructional costs examines how costs can be decreased through reducing scope, increasing economies of scale, eliminating the cost disease, and altering incentives. We conclude the chapter by describing several promising areas for future research.


Costs Higher education Cost disease Revenue theory of costs Positional arms races Principal-agent problem Determinants of costs Economies of scale Economies of scope Multi-product cost functions Stochastic frontier analysis Data envelopment analysis Instructional costs Contingent faculty Instructional technology Online education Administrative costs 


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© Springer International Publishing Switzerland 2016

Authors and Affiliations

  1. 1.Department of Education Policies StudiesPennsylvania State UniversityUniversity ParkUSA
  2. 2.Higher Education AdministrationUniversity of FloridaGainesvilleUSA
  3. 3.Department of Higher Education, Center of the Study for Higher EducationPennsylvania State UniversityUniversity ParkUSA
  4. 4.Spring Arbor UniversityJacksonUSA

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