Academic journal article International Advances in Economic Research

Declining State Funding and Efficiency Effects on Public Higher Education: Government Really Does Matter

Academic journal article International Advances in Economic Research

Declining State Funding and Efficiency Effects on Public Higher Education: Government Really Does Matter

Article excerpt

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.

Keywords Stochastic cost frontier * Public universities * State funding * Efficiency

JEL Classifications D2 * I21 * I22 * I23 * L3 * C33


Publicly owned and operated colleges and universities have undergone decades of protracted declines in state legislated funding support. Nothing, however, has witnessed the accelerated declines in such support induced by the financial crisis and the Great Recession. At the outset of the 2004 academic year, state funding represented 32 % of public college and university revenues (GAO 2014). By 2008, it declined marginally to 31 %. Thereafter, it dropped unremittingly to 23 % by 2013. The question arising from that transformation in support is whether or not it affects the efficiency in producing publicly provided higher education, i.e., does government matter?

That question provides the main thrust of the present inquiry but revisits and substantially extends the previous work of the same by Sav (2012a). That earlier work, covering four academic years, 2005 through 2008, provided empirical evidence that (1) government does matter in that increases in such funding improve the efficiency of publicly funded universities and (2) that the 2008 academic year showed some slight efficiency gain, possibly resulting from managerial adjustments to the financial crisis. However, ending with the 2008, that study could not account for the effects of the subsequent and accelerated declines in state funding. Moreover, with such declines, the prospect of sustainable efficiency gains seems unlikely. That, however, requires additional empirical tests with data that encompasses those funding shifts.

To that end, the present study offers a more comprehensive ability to evaluate the potential impacts of those funding shifts. It covers 10 academic years, 2004 through 2013, of university production and costs. The same stochastic frontier methodology is employed to estimate a cost frontier with environmental factors included in an inefficiency term. The basic concept underlying that approach involves the notion that university inefficiency (or efficiency) is subject to random shocks but also managerial decision-making or environmental factors beyond managerial control. Those factors can cause universities to operate inefficiently above their stochastically minimum costs. Here, the task is to determine how changes in legislative levels of government funding, specifically state legislated funding, as an environmental factor possibly affect university operating inefficiencies. (1)

But additional environmental factors, heretofore not accounted for, have simultaneously accompanied state funding changes and potentially affect university cost inefficiencies. …

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