Draft: Please do not cite without permission from the author.Introduction
The network of incentives driving higher education’s economic performance is not properlyaligned with the public interest.
This conclusion follows from two discouraging trends inhigher education. First, college affordability has declined among an increasingly large share of middle class households.
Second, a growing body of evidence suggests the quality of undergraduate education is also declining.
The public might tolerate rising cost accompanied byrising quality, but rising cost and declining quality is a dangerous trend that cannot be continued.But the news is not all bad. The good news is higher education responds to economic incentives.Get the incentives right and economic performance improves. Higher education reform is nothopeless. The objective of this chapter is to identify the incentive network within and around highereducation; this network drives cost higher and leads to lower quality. Understanding theincentives reveals opportunities for reform. I consider both the incentive structure inside eachinstitution and the external incentive structure that binds all higher education institutions togetherin competition for students and public support. The entire incentive network—also referred to as“higher education governance”—includes the governance of individual institutions (tenurepolicies; compensation policies; and the role of faculty, administrators, and boards), oversightand support from federal and state governments (regulation and subsidies), accreditationagencies (the “captured regulators”), and the peculiar nature of what economists term“experience goods” competition (which occurs when there is uncertainty about the quality of service provided in absence of experience, as is the case with higher education). As we will seebelow, many facets of the governance structure push higher education toward higher costs,minimal transparency about outcomes, and a low level of quality control.1