Abstract
This paper compares the organisation of the university sector under unregulated private provision with the structure which would be chosen by a welfare maximising government. It studies a general equilibrium model where students attend university to earn higher incomes in the labour market, and universities teach them and carry out research. Each university chooses its tuition fee to maximise the amount of resources it can devote to research. Research bestows an externality on society. Government intervention needs to balance labour market efficiency considerations – which would tend to equalise the number of students attending each university – with considerations of efficiency on the production side, which suggest that the most productive universities should teach more students and carry out more research. We find that government concentrates research more that the private market would, but less than it would like to do if it had perfect information about the productivity of universities. It also allows fewer universities than would operate in a private system.
Highlights
This paper studies the optimal organisation of the university sector
The value of θ for which this 1+λ intersection reaches the axis is the type of the least productive university that teaches any students: clearly this happens for the same value when provision is via an unfettered private market and in the first best, and for a lower value of θ when the government has imperfect information: fewer universities are active in this case
This paper studies how a utilitarian government should intervene in the university sector
Summary
This paper studies the optimal organisation of the university sector. Theoretical analyses devoted to this topic are scarce, relative, for example, to public sector procurement, health care, and primary and secondary school systems. The gist of our results can be summarized by stating that the unfettered private market spreads research too thinly, and the government would like to concentrate research and teaching in the most productive universities It may affect the number of universities in the top 200 hundred in the Shanghai Jiao Tong University ranking (which includes 22 of the 129 British and five of the 57 Italian universities), but if the marginal cost of research is increasing, concentration of funding may not be the best structure, and it may be more efficient instead to spread resources across institutions Both in the UK and in Italy, like in the rest of Europe, universities are government funded and regulated (for example in the tuition fees they can charge) to a very considerable extent. The proofs of all mathematical results are gathered in the Appendix
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