The College Cost Disease // Robert E. Martin

The College Cost Disease: Higher Cost and Lower Quality

INTRODUCTION

After 1980, college cost per student rose at pace with or faster than healthcare costs, placing an increasing burden on society; they are the two highest cost areas in our economy. Unlike healthcare, teaching quality is in secular decline. Rapidly rising cost and declining quality are not trends easily forgiven by any society.

Addressing these problems without understanding the incentive system will lead to unintended consequences. This book provides a behavioral framework for our chronic cost/quality problems. Specifically, H R Bowen formulated the “revenue theory of cost” in 1980 based on an intensive empirical analysis. Bowen’s theory is very consistent with the actual history of higher education cost since 1980. What has been lacking is a behavioral framework for his theory of cost; this book contains that framework.

Reputation competition dominates higher education. Reputations are important only if consumers are uncertain about quality prior to purchase. Students and parents tend to associate higher tuition with higher quality;

again, price is used as a proxy for quality only if consumers are uncertain about quality. The services offered by higher education are the most complex types of “experience goods;” a service whose quality can only be determined after purchasing the service. The formal theory of experience goods provides many compelling insights into the cost and quality issues plaguing higher education.

The principal/agent problem is common among for-profit firms, voters/politicians, the medical profession, and the legal profession. There are powerful constraints on the principal/agent problem among for-profit firms and politicians, while there are few constraints on the problem in higher education. Further, an unchecked principal/agent problem always causes costs to be higher than necessary. Higher education’s unique cost history is consistent with a serious principal/agent problem.

The intersection of experience good theory, the principal/agent problem, and nonprofit status is the behavioral framework for Bowen’s revenue theory of cost.