The Efficiency of Tenure Contracts in Academic Employment

• DOI: http://doi.org/10.1111/jpet.12201
• Author: BRUCE CATER,MARCUS PIVATO,BYRON LEW
• Published date: 01 April 2017
• Date: 01 April 2017

THE EFFICIENCY OF TENURE CONTRACTS

IN ACADEMIC EMPLOYMENT

BRUCE CATER and BYRON LEW

Trent University

MARCUS PIVATO

University of Cergy-Pontoise

Abstract

Academic research is a public good whose production is supported by

the tuition-paying students that a faculty’s research accomplishments

attract. A professor’s spot contribution to the university’s revenues thus

depends not on her spot research production, but rather on her en-

tire cumulative research record. We show that, under a broad range of

education market conditions, a profit-maximizing university will apply

a “high” minimum retention standard to the production of a junior

professor who has no record of past research, but a “zero” retention

standard to the spot production of a more senior professor whose back-

ground includes accomplishments sufficient to have cleared the “high”

probationary hurdle. But if and when those education market condi-

tions change, tenure-based contracts may cease to be optimal.

1. Introduction

For decades, the most widely used employment arrangement between a university and

a professor was the tenure-track contract. Under that contract, a professor who fails

to meet some positive standard of research production during a finite probationary

period is dismissed at that period’s end. Yet, a professor who meets that initial standard

is granted tenure and retained regardless of her research output thereafter.1

1Siow (1998) notes that, in the 1989 Survey Among College and University Faculty sponsored by the

Carnegie Foundation 4.7% and 36.4% of tenured faculty in doctoral-granting and nondoctoral-

granting schools, respectively, reported no publications in the previous two years and no current re-

search. Yet, in their reviews of U.S. case law, legal scholars including Hendrickson (1988) and Morris

Bruce Cater, Department of Economics, Trent University, Peterborough, Ontario, Canada K9J 7B8

(bcater@trentu.ca). Byron Lew, Department of Economics, Trent University, Peterborough, Ontario,

Canada K9J 7B8 (blew@trentu.ca). Marcus Pivato, THEMA, Universit´

e de Cergy-Pontoise, 33 boiule-

vard du Port, 95011 Cergy-Pontoise Cedex, France (marcuspivato@gmail.com).

We are grateful to Barry Smith, Michael Waldman, Myrna Wooders, and an anonymous referee for

many helpful comments and suggestions on this and a number of earlier drafts. Wea lso thankDuc Hien

Nguyen and Stephen Swanson for excellent research assistance. Financial support from Trent Univer-

sity,NSERC grant 262620-2008, and Labex MME-DII (ANR11-LBX-0023-01) is gratefully acknowledged.

Received June 30, 2014; Accepted November 3, 2015.

C2016 Wiley Periodicals, Inc.

Journal of Public Economic Theory, 19 (2), 2017, pp. 331–361.

331

332 Journal of Public Economic Theory

This contractual choice raises several questions:

1. The dismissal of those who are initially unproductive makes it clear that re-

search is somehow important to a university. Why, then, would it not insist that

a professor be productive in research at every stage of her career?

2. The research production of academics declines with age (Diamond 1986; Levin

and Stephan 1991; Kenny and Studley 1995; Oster and Hamermesh 1998). Does

this pattern reflect some disincentive effect, and therefore a major drawback of

tenure?

3. If the sort of leniency associated with tenure is somehow efficient, why do uni-

versities stand alone in extending that leniency?2

4. If universities derive some unique benefit from granting tenure, how is their

recent and ongoing shift away from the use of tenure-eligible faculty to be ex-

plained?3

A number of efficiency-based explanations of tenure have been proposed.4Free-

man (1977) suggests that risk-averse professors are granted the security of tenure to

compensate for the risk inherent in their research. Yet, nonacademic employers manage

to compensate workers who are risk-averse and whose productivity is uncertain without

ever having to forgive very poor performance of a core duty. So, while offering a plausi-

ble solution to Question 1, this theory cannot resolve Question 3, let alone Questions 2

and 4.

Carmichael (1988) suggests that a university faces a unique problem. Because the

state of academic knowledge is vast and expanding, it is the incumbent occupants of its

scarce faculty slots who can best judge the research potential of candidates. To maxi-

mize its research production, the university provides those incumbents with the security

of tenure to ensure that they are willing to identify and hire candidates superior to them-

selves. This is an elegant solution to Questions 1 and 3. In assuming that a professor’s

research production is governed only by ability and not by effort, however, Carmichael

does not seek to explore Question 2. Indeed, the analysis abstracts from that question’s

very premise by assuming that expected research output is constant, rather than dimin-

ishing, over a professor’s life cycle. This overstates the relative contribution of older,

tenured professors and biases the analysis toward a finding that tenure is optimal for

(1992) cite no cases in which a tenured professor was dismissed primarily for low research productivity.

The minimum research production standard for a tenured professor is, therefore, effectively “zero.”

2Partnerships in legal, medical, and consulting practices also involve quasi-permanent appointments

granted to those who succeed during a probationary period. But those arrangements are not character-

ized by the postprobationary leniency of tenure—a “partner” who ceases to perform one of the tasks he

was initially hired to perform will be terminated. Similarly, K-12 teachers are granted “tenure” follow-

ing a probationary period. But teacher contracts explicitly provide for the dismissal of “incompetent”

teachers, and while teacher unions understandably make the process of termination difficult and costly

for a school board, terminations do occur. Indeed, the National Council of Teacher Quality actually

grades U.S. states on the effectiveness of their policies regarding the dismissal of ineffective teachers.

3In 1975, 56.8% of U.S. faculty were tenured or on a tenure track, whereas 13% were full-time

nontenure-track and 30.2% were part-time. By 2007, only 31.2% of faculty were tenured or tenure-

eligible, while the full-time nontenure-track and part-time contingent groups had increased to 18.5%

and 50.3%, respectively (AAUP 2008–2009 Report on the Economic Status of the Profession).

4McKenzie (1996) and McPherson and Schapiro (1999) attempt to explain academic tenure on inter-

nal political grounds. Kahn and Huberman (1988) and Waldman (1990) offer economic explanations

of the use of “up-or-out” contracts, but do not address the issue of postprobationary minimum produc-

tion standards.