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The Weird Economics of Elite Higher Education

January 31, 2008

I was inspired by the WSJ’s Wealth Report column and comments to write down some thought I have had for a while about the economics of elite higher education. Namely, the reasons why elite higher education is a weird market. Here are a few thoughts on the ways this is true:

First, because so much of the cost of one’s education is subsidized by the school’s endowment, it is hard to have confidence that the students are really are getting a value up to the level of the real cost of their education.

Second, it has been a economic puzzle why universities should have endowments at all. Other businesses with similar characteristics do not.

Third, what is the goal the universities intend to accomplish? In practice the goal seems to be to attract the best students and give them the best education possible. This explains the lavish financial aid packages to compete for desirable students and the exorbitant amounts they spend to educate them. I can’t help but think that the world would be better off if $1 billion of the Harvard endowment were spent on various other private initiatives for at-risk kids.

Fourth, given my third point, why do private donors continue to make donations to elite private colleges and universities with large endowments?

Fifth, such institutions are also being run to satisfy another constituency: faculty and administration, for whom a substantial part of their compensation is non-monetary (e.g., nice surroundings, smart, diverse students and large research grants). This isn’t necessarily a problem, just another anomaly.

Sixth, there is no concerted systematic effort to measure the value being provided either to the students or to society by these institutions.

As an Dartmouth alum who is asked to give money, these are some of the factors that make that decision a hard one. The dominant though is: wouldn’t another charity make better (in terms of being helpful to the world) use of my money?


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