An enquiry into the rationales of economic regulation and provision of higher education

Abstract

With the great evolution in the human capital theory starting from the early 60s mainly because of the contributions of Nobel economists such as Theodore Schulz, Gary Becker and Milton Friedman, more light was shed directly or indirectly on the problems related to the regulation and the provision of higher education. Despite the views from different angles: development economics, investment theory or education economics; there is a wide consensus on the importance of higher education for the augmentation of the stock of human capital in the society. Human capital is a broad concept that includes multifold elements embodied in the individuals, such as schooling, knowledge and health; and virtues such as punctuality, honesty, etc., (Becker, 1994). However, schooling is considered as an element of major weight that has cross effects also on the rest of components: a better educated person is more likely to be healthy, knowledgeable, punctual and honest. Schultz (1981) pointed out the importance of higher education training in the developing countries in order to support economic growth and reduce poverty, in spite of the suspects to political influences and short-term commitments. In addition, Schultz was aware of the fact that for modern economies, natural resources, physical capital and raw labor are not sufficient. For competitive and sustainable economies or for those wanting to become soon, the stock and investment in human capital through higher education training is crucial. Mincer (1958) threw the bedrocks for a theoretical and an empirical explanation of inter-occupational differences and income distributions according to different amounts and durations of investment in human capital. His models form the foundations to explain the income inequality and the private returns to education. Friedman (1962) argued on the importance of general education for citizenship creation and the wide-acceptance of some common values, known as social returns. In the other side, vocational education especially contributes to the increase in private returns. Hence, the grounds of regulation have to be different. Further recent studies have proved empirically the contribution of higher education in the creation of human capital. Abel and Deitz (2009) run an empirical study for the US, finding significant positive relationship between the university activities (e.g. degree awarding, research, etc.) and the stock of human capital in several regions. In addition, they learned that colleges and universities can raise the level of human capital by increasing both, supply and demand for it. The latter is understandable due to the enormous cases of university spin-offs in the US. Andersson et al., (2004) went further also with an empirical study which identified significant effects of spatial decentralization in tertiary education on the productivity and output per worker. They found significant productivity gains in the Swedish regions, which had received more university-based investments as measured by the number of researchers employed or the number of students enrolled. On the other hand, the gains from investment in education are not only market-type but there are also remarkable non-market gains. Helliwell and Putnam (2007), using a broad range of evidence showed that the increases in education levels improve trust and do not reduce political and social participation. Furthermore, according to their study, the concepts of trust and social engagements are two main components in the creation of the social capital. Annual publications from OECD ¿Education at a Glance¿ report the existence of social outcomes such as: life satisfaction, civic engagement, electoral participation, and trust. All aforementioned studies underline higher education as a key factor in the creation of human and social capital. There is no doubt that higher education contributes positively to the creation of both, however there are many points to argue regarding the manner of regulation and provision that ensures the maximum production of human and social capital for a given level of invested resources. Consequently, we go back to the classical economic problem, defining and reaching the production-possibility frontier. It is also understandable that the forms of regulation and provision of higher education can be an important tool for the governments to affect the composition, the level and the quality of human and social capital. To our knowledge, there is no much research either macro or micro that is exclusively focused on the relationship between the higher education market composition and the performance of the systems. As composition we refer to the type of regulation (e.g. deregulated, highly-regulated). The concept of regulation is strongly related to the level of participation, either public or private, in terms of levels of spending per GDP, market coverage, etc. In the first instance, we will see the problem of provision or regulation from a macro-perspective. An enquiry into the grounds on which either a public or private provision of higher education should be supported, will explain more about the issue. The enquiry will include: classical and neoclassical economic thought, theoretical background on information problems, real-world case review, and empirical evidence. In order to classify the biggest representative systems, variables such as: quality control, tuition fees, selectivity, and regulation strategies, will be employed. The classification will complement our empirical analysis, in order to find possible relationships between the denominated structure variables and the variables that at least theoretically define the performance (e.g. entry rate, graduation rate, student-professor rate). In the other side, referring to the relevant literature, we have the following contribution to the micro level: Romero and Del Rey (2004) showed the reward of a mixed duopoly in comparison with a state monopoly in the provision of higher education. In a three stage game with a vector of variables that includes: quality, prices and student ability; their found equilibria, is the market partition in which the public university provides higher educational quality than the private one. In synchrony with the classical micro theory, they found that competition raises total welfare. On the other hand, in a similar framework, Romero (2005) studied the effect of borrowing constrains over public and private monopoly. In case of public, quality and ability standards were not affected, but in case of private a loss in quality and a decrease in prices or tuition fees was produced. We go further, inside the micro-perspective offering a comparison between the public and the private monopoly in the higher education market. Adopting a similar framework of preferences¿ distributions, costs, and human capital production, we will try to give more insights into the social welfare produced and the relationships under the boundary conditions, the points where public and private social welfare become equal. In addition, we compare the equilibrium results under two types of duopoly competition: Cournot and Stackelberg, assuming that universities are under strict regulation for price and quality standards. Consequently, they will be able to compete only in student ability level. We believe that both micro scenarios will complete a little more our understanding about monopolistic and oligopolistic competition in the higher education market. In sum, we believe that our study is wide-inclusive as it involves a route from a macro to a micro perspective. It permits to spot the policies that can work at the macro-scale within certain limits due to complexity, heterogeneity, country contexts, etc. The micro-perspective complements more the literature and establishes the basis for the incorporation of several additional elements related to the human capital creation. Additionally, it can create the fundaments for a more interdisciplinary view in the future through a possible adoption of the concepts of bridging and bonding capital (Putnam, 2000) born in Political Sciences, which can further enrich our understanding of higher education sector.