Friday, April 27, 2007

Incentivizing Excellence

By Richard Vedder

Universities like to think they are superior to their K-12 brethren in the sense that success is generally rewarded by promotions, merit pay increases, nicer offices, etc. A good K-12 teacher is treated the same as a poor one in most of public education. That is different in higher ed. Consumers of higher ed have more choice, and have to pay something for the services consumed, imparting a bit of market discipline, unlike with our public school monopolies. In large part for these reasons, we have mediocre primary and secondary education by international standards, but a decent, respectable (some would say premier) higher education system. I wrote a longer piece on that a few years ago for the CATO Journal.

Yet university costs are rising and productivity is likely falling. One part of the solution is a measurement/reporting issue --finding new metrics to measure institutional performance, and then publicizing those measures to the public. That is at the heart of a current controversy over rule-making regarding accreditation organizations going on in Washington. This was a key issue before the Spellings Commission.

Yet the second part of the solution is seldom discussed --increasing the incentives for excellence in performance and ingenuity in cost reduction. Higher ed will not change if the staff refuses to cooperate, and the "rules of the game" with respect to promotion, tenure, salary increases, etc., needs to change. People need to be rewarded more on performance.

One metric is moderately easy to measure --research reputation. Partly for that reason, faculty advancement depends mainly on publications, never mind the fact that no one is doing cost-benefit analysis on the contributions of that research to society. Has the incremental publication brought about by the de-emphasis in teaching in modern times also brought about improvements in incomes, outputs, life expectancy, and human happiness? Do people migrate into areas of high research intensity because of the positive spillover effects of that research activity on the quality of life?

At the administrative level, do we reward deans who do more with less? (answer: rarely). Do we give bonuses to persons who develop on-line programs where student performance equals that of traditional methods -- but costs per student are lower? Do we reward presidents who keep tuition fees down? (answer --no; the big bucks are going to the presidents of institutions where costs are high and rising faster).

One way to reform is to increase the market share of for-profit institutions, where the financial incentives to be productive and efficient are great. But we need to also increase those incentives in not-for-profit institutions. Reducing rigidities like tenure is a helpful start, but we need to introduce markets more throughout university life. Departments should have to rent space from the central administration, perhaps, with rents varying with the demand for space --done correctly, this will increase capital utilization and dramatically lower new capital expenses. I could go on and on, but I have to go speak to a group of state legislators pondering public policy issues in the squalor of a luxury resort on Hilton Head Island.

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