Paying the Piper: Productivity, Incentives, and Financing in U.S. Higher Education.

• Author: Getz, Malcolm

Who pays the piper in higher education? This provocative theme runs through this delightfully readable collection of essays on productivity, faculty tenure, financial aid, and accounting practice in colleges and universities in the United States. The discourse reflects institutional detail, yet challenges conventional wisdom.

The core of the discussion is a series of essays by McPherson on federal financial aid programs. There are two core issues. First, does federal aid increase enrollment? Aggregate time series evidence examined by Hansen and others raised doubt about whether aid influenced enrollment behavior while cross-section evidence by Manski and Wise and others suggested that enrollment is responsive to aid. McPherson resolves the conflict by using aggregate, time series evidence, carefully treating aid as a credit toward tuition and allowing enrollment effects to differ by income group. His time-series evidence indicates that the level of federal student aid has a positive effect on enrollment, giving a result similar to that found in the cross-section studies. Federal aid then tended to increase college enrollments as it expanded through the 1970s and caused some decline in enrollments through the 1980s as the level of federal aid declined in real terms. McPherson leaves little doubt, then, that higher federal aid to students increases enrollment.

Second, does an increase in federal aid cause colleges and universities to increase their prices? One might expect increases in sticker prices in response to increasing federal aid if the formulas for aid were tied to tuition rates much as Medicaid entitlements seem to increase the price of medical services. McPherson notes, however, that federal aid to individual students in higher education has been capped at levels well below the tuition level even at most public institutions, and so increases in tuition do not increase federal aid. In addition, the essay reports regressions with institutional data that finds that changes in federal aid, for private institutions, not only is not associated with tuition increases, but higher federal aid is associated with lower tuition as institutions spend less on their own financial aid programs. If federal student aid is reduced still further in the 1990s, McPherson expects private tuitions to increase faster to support institutional scholarships.

An essay by McPherson and Winston on faculty tenure views the tenure process as a rational policy for...