Price-Cost Ratios in Higher Education: Subsidy Structure and Policy Implications

Abstract

The diversity of US institutions of higher education is manifested in many ways. This study looks at that diversity from the economic perspective by studying the subsidy structure through the distribution of institutional price-cost ratio (PCR), defined as the sum of net tuition price divided by total supplier cost and equals to one minus subsidy-cost ratio (SCR). IPEDS Finance, Enrollment, and Institutional Characteristics survey data for academic year 2006-2007 are used.Significant between-sector differences are found in terms of both central locations and ranges of PCR. Public two-year institutions have the lowest average PCR (0.12) and smallest within-group variation while for-profit four-year institutions have the highest average PCR (0.93). The within-group variations are quite large for both private nonprofit and for-profit sectors. Nine types of subsidy structure are constructed and used to categorize institutions, which reveal considerable overlapping between public and private nonprofit sectors and between private nonprofit and for-profit sectors. Private nonprofit sector is consistently shown as the "hybrid" sector with more similarities to the public sector.This study highlights price-cost ratio as an important metric for economics of higher education because it integrates targeted price adjustments (list price - net price) and general subsidy (supplier cost - list price), allows for negative subsidy, and accounts for cost variations. It succinctly provides a holistic view of the subsidy-profit spectrum and serves the purpose to rectify the currently skewed perspective that predominantly focuses on "student aid" (redefined as "targeted price adjustments") and for the most part excludes the for-profit sector. A byproduct of this study is a detailed account of how to adjust new GASB/FASB-based IPEDS Finance data to derive meaningful price and cost measures to support cross-sector comparison.