Should universities be subsidized? – A reference point view

Eva Berde

Abstract


Because of the central importance of higher education and its long-turn positive extern effects on the whole society, the government often might wish to enforce its will on the universities through the subsidy it provides to them. Thus the question arises: what are the welfare consequences of state subsidies offered to universities? I try to answer this question with the recently developed tools of the so-called reference point theory, established by Oliver Hart and his coauthors. In my model the two participants are the government and the university. The university is controlled exclusively by a rector and the representative of the government is the administrator. The objective of the administrator is to maximize public welfare, whereas the rector maximizes her own payoff. The administrator offers a subsidy that comes together with the obligation to fulfill the state's instructions. Since these ‘handcuffs’ are usually against the rector's own interest, but subsidy is valuable to the rector, there is a tradeoff. I investigate the optimal behavior of the rector in two cases: a private university and a state owned public university. In spite of the simplified assumptions, this setup undoubtedly shows the ambiguous nature of subsidies. 


Keywords


Higher education; Private university; State university; Subsidy.

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References


Barr, N. (2004). Higher education and funding. Oxford Review of Economic Policy, 20, 264-283. http://dx.doi.org/10.1093/oxrep/grh015

Hart, O. D. (2008). Economica Coase Lecture. Reference points and the theory of the firm. Economica, 75, 404-411. http://dx.doi.org/10.1111/j.1468-0335.2007.00659.x

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Hart, O. D. (2011). Noncontractible investments and reference points. (NBER Working Paper Series. 16929). Cambridge, MA: National Bureau of Economic Research. Retrieved September 20, 2012, from http://www.nber.org/papers/w16929.pdf

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DOI: http://dx.doi.org/10.18533/jefs.v1i01.37

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