Theories of Organizational Finance

Goals of Higher EducationMultiple missions

TeachingResearch Public service

Each mission is socially valuable but privately unprofitable

Awkward EconomicsNon-profit enterprisesNon-distribution constraintTrust industries

Asymmetric informationBuyer is vulnerable to seller’s opportunismNon-profit motive gives buyer confidenceEducation is a one-shot purchase

Pursuit of excellenceFuzzy goals

Awkward EconomicsCustomer as Input Production TechnologyConsumers are also outputs

Peer effectsBuy vs. create an education

Hierarchy mattersSales maximization may not be desirable

Restricted admissions

Higher Education as BusinessConsumerismInstitutions serves the interests of various

groups (i.e. customers)StudentsCorporations

Offer products to attract studentsRec. Centers, dorms, winning football teams

Offer products to attract corporationsResearch, trained students

Other Finance TheoriesBaumol’s Cost Disease

Economic theory predicts that wages rise as labor productivity increases – tied closely together

Labor productivity has been stagnant (or difficult to improve) in fields such as education and the arts Faculty to student ratios remain relatively constant

It is difficult to substitute labor for capital in these fields due to increasing wages paid in other fields

Thus, prices will rise faster than inflation in these fields.

Other Finance TheoriesBowen’s revenue theory of cost

“The unit cost of education is determined by the amount of revenues currently available for education relative to enrollment”

The cost of education is directly determined by how much revenue is available to create that education. Non-profit status is key to this theory Prestige maximizers Students as consumers Illustrated in the next slide

Delta Cost Project – Trends in College Spending

Small Group Discussion For the following organizations on campus:

1. Enrollment Management2. Residence Life3. Athletic Department4. MU Libraries5. MU Hospitals and Clinics

What are the stated goals of the organization?How do they contribute to the overall mission of

the university?How do they generate their revenues?Do they act more like a non-profit or profit-

making firm?

Small/Large Discussion QuestionOn Monday, Sweet Briar College announced

to stakeholders that the college will cease to exist after this coming summer session despite an $85 million endowment. How can higher education finance theories explain the choice of Sweet Briar College to close?

Small/Large Discussion QuestionDescribe why the customer-input technology

and peer quality discussions are important for the following sectors of higher education:1. Public community colleges2. For-profit colleges3. Historically Black colleges and universities4. Public Master’s granting universities (open

access)5. Public liberal arts universities

Small/Large Discussion QuestionHow does the business model of higher

education directly support in fulfilling the mission of an educational institution?1. How is it different for elite and non-elite

universities?2. How is it different for non-profit and for-profit

universities?

Small/Large Discussion QuestionTo account for cost disease that permeates

higher education, Weisbrod, Ballou, and Asch (2008) note that competition among comparable institutions for revenue is on the rise (p. 34). Does this increased competition move some higher education institution missions closer to the academic market than others?  

Small/Large Discussion QuestionWhat changes can we make to the current

managerial objectives that would return higher education to better serve its founding purpose?