A theory of government enterprise: University Ph. D. production

Abstract

In a recent study, Lindsay (1976) proposed a theory of government enterprise based in part on the costs of monitoring managerial performance. He argued that because the public authority (in his case Congress) does not in general establish product value by market price, it must rely on measuring product attributes; since the authority will be able to monitor only highly visible product attributes, managers will direct resources toward these attributes and away from less visible and unmeasured attributes. Proprietary firms, in contrast, rely on paying customers to meter all of the product's attributes, with undesirable deviations in the attribute mix reflected in falling product price and profits. The more complete monitoring of product attributes for proprietary firms will insure that their products more closely match consumer demands and are thus of a higher quality. Empirically, Lindsay implements his theory by comparing VA hospitals with proprietary and voluntary hospitals, theorizing that because Congress meters output by patient days but not patient care, VA hospital managers will have an incentive to keep the wards filled but devote fewer resources to care. This leads him to predict, and indeed confirm, that the average length of stay, for a given ailment, is substantially longer in VA than voluntary hospitals. In this paper, I examine the same phenomena as it occurs in public universities. In public universities, tuition is held below the market clearing price, preventing market valuation of the product mix, and forcing the public authority to monitor a subset of product attributes. In general, the attribute selected is simply enrollment, with funding directly linked to the number of FTE (full time equivalent) students an attribute strikingly similar to beddays in hospitals. As a result, one can predict that university managers will divert resources toward enrollment and away from instruction, e.g., larger classes, lower admission standards, fewer auxiliary facilities, less financial assistance, less preparation for the classroom by instructors. If these policies are not met by an equivalent fall in standards for awarding degrees, public university students should have a diminished chance of earning a degree. It is this possibility which I wish to test. Though a fall in standards may occur, there is a priori reason to believe