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Revisiting Economies of Scale and Scope in Higher Education

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Higher Education: Handbook of Theory and Research

Part of the book series: Higher Education: Handbook of Theory and Research ((HATR,volume 33))

Abstract

In this chapter, we examine the range of methods used by researchers to assess economies of scale and scope in higher education. We begin by providing some context for why researchers and policy makers are interested in the relationship between an institution’s size and scope and their cost per unit of output. We then provide an explanation of the alternative methods that have been used in studies, the advantages and disadvantages of each method, and how they can be applied to different types of institutions. Next, we conduct a thorough review of the empirical literature on higher education. Finally, we use more current data from the 2012–2013 academic year on institutional finances to reexamine whether there are economies of scale and/or scope in higher education. Our findings show that across methods and sectors there is clear evidence of economies of scale, and that the results for economies of scope are more mixed due to methodological challenges with the models.

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Notes

  1. 1.

    Public service is usually omitted from consideration due to the lack of data on service outputs. Nonetheless, it is arguably an important part of an institution’s production function.

  2. 2.

    It is common in these optimization problems to focus on the decision variables K and L and set aside the shadow price parameter τ. This value reflects the change in the production function on optimization.

  3. 3.

    The marginal costs shown in this illustration are slightly different from what is obtained by taking the partial derivative of the total cost function. The partial derivative formula shows the change in total costs due to a one-unit increase in output, whereas the illustration in Table 8.1 shows the change in total costs due to a 1000-unit increase in output.

  4. 4.

    Estimated total cost is affected by all of the linear, quadratic, and interaction terms involving Q 1 .

  5. 5.

    The Carnegie classifications were based on number of degrees awarded by level and research dollars. Two-year associate institutions were defined as having a Carnegie classification code of 40 (“Associate’s Colleges”). Four-year teaching-oriented institutions had a Carnegie classification code of either 31 (“Baccalaureate Colleges – Liberal Arts”), 32 (“Baccalaureate Colleges – General”), or 33 (“Baccalaureate/Associate’s Colleges”). Four-year research-oriented institutions had a Carnegie classification code of either 15 (“Doctoral/Research Universities – Extensive”), 16 (“Doctoral/Research Universities – Intensive”), 21 (“Master’s Colleges and Universities I”), or 22 (“Master’s Colleges and Universities II”).

  6. 6.

    We only used mathematics scores due to its high correlation with reading scores.

  7. 7.

    The average cost-minimizing output was found by taking the partial derivative of average cost in the third model with respect to enrollments, setting this derivative equal to zero, and solving for FTE enrollments.

  8. 8.

    The marginal cost equation for model (1), for example, is therefore written as: ∂TC/∂Q = 6.632 + (2)(−0.000037)Q + 0.059 ∗ AvgSal, where AvgSal = average faculty salary.

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Acknowledgements

An earlier version of this paper was presented at the meeting of the Association for Education Finance and Policy (AEFP), Denver, CO, March 17–19, 2016 and the meeting of the Association for the Study of Higher Education (ASHE), Houston, TX, November 9–11, 2017. We would like to thank Keith Allen for his help at the early stages of this project, and Steve DesJardins, Steve Porter, and Sarah Pingel for their helpful comments on earlier drafts of this paper.

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  1. Institute of Higher Education, University of Georgia, Athens, GA, USA

    Robert K. Toutkoushian & Jason C. Lee

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Correspondence to Robert K. Toutkoushian .

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  1. Department of Educational Policy and Leadership Studies N491 Lindquist Center, University of Iowa, Iowa City, Iowa, USA

    Michael B. Paulsen

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Toutkoushian, R.K., Lee, J.C. (2018). Revisiting Economies of Scale and Scope in Higher Education. In: Paulsen, M. (eds) Higher Education: Handbook of Theory and Research. Higher Education: Handbook of Theory and Research, vol 33. Springer, Cham. https://doi.org/10.1007/978-3-319-72490-4_8

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