Cross-Subsidization in Higher Education: Does it Pervert Private Choice and Public Policy?
During the 1950s and 1960s American higher education underwent a major change in size and structure, with a vast expansion in enrollments and increased emphasis on graduate training and research, relative to undergraduate teaching. This chapter explores the implications of this changing product mix for our understanding of costs, subsidies, financing methods, and decision-making structures in higher education. We ask the following questions: . . . 1. How did universities finance their production of graduate training and research (G and R), which usually do not bring in enough revenues to cover their costs? 2. What differences, if any, were there in the behavior of public and private universities regarding the shift toward G and R? 3. How did this change in product mix affect relative costs in universities versus two- and four-year colleges, which still specialize in undergraduate teaching? 4. What are the implications of this analysis for our understanding of the costs and benefits of education and for future public policy? For example, to what degree do state legislators and private donors control the product mix in higher education and who ultimately gains from the resources they provide?. . . Specifically, I characterize universities as multiproduct nonprofit organizations (NPOs) engaging in the teaching of undergraduates as a profitable activity, in order to subsidize graduate training and research, which are loss-making but yield direct utility to them. Cross-subsidization by NPOs, then, is an alternative to direct government funding of socially beneficial goods such as research, under certain circumstances. With certain differences that we shall note, this characterization applies to public and private institutions, and the term NPO is used for both in this chapter. At private universities, during the 1950s and 1960s, profits were generated mainly by huge tuition increases, made possible by rapidly rising demand, as we shall see below. State universities, too, engaged in cross-subsidization to finance G and R. However, since state universities often do not control or retain tuition revenue, their main device was a decrease in teaching cost per student.
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