AEAweb: JEP: Contents: Winter 1999

Journal of Economic Perspectives
Vol. 13, No. 1, Winter 1999

Contents

The Familiar but Curious Economics of Higher Education: Introduction to a Symposium
Charles T. Clotfelter      3-12

Subsidies, Hierarchy and Peers: The Awkward Economics of Higher Education
Gordon C. Winston      13-36

The Shaping of Higher Education: The Formative Years in the United States, 1890 to 1940
Claudia Goldin and Lawrence F. Katz      37-62

The Community College: Educating Students at the Margin between College and Work
Thomas J. Kane and Cecilia Elena Rouse      63-84

Tenure Issues in Higher Education
Michael S. McPherson and Morton Owen Schapiro      85-98

Adam Smith Goes to College: An Economist Becomes an Academic Administrator
Ronald G. Ehrenberg      99-116

Will Aging Baby Boomers Bust the Federal Budget?
Ronald Lee and Jonathan Skinner      117-140

Change, Consolidation, and Competition in Health Care Markets
Martin Gaynor and Deborah Haas-Wilson      141-164

Asymmetric Information and Public Economics: The Mirrlees-Vickrey Nobel Prize
Agnar Sandmo      165-180

Policy Watch: Developments in Antitrust Economics
Jonathan B. Baker      181-194

Retrospectives: Say's Law
William J. Baumol      195-204

Classroom Games: A Market for Lemons
Charles A. Holt and Roger Sherman      205-214

Features:
Recommendations for Further Reading      215-222
Correspondence      223-225
Notes      227-231 

Despite the involvement of two-thirds of economists in it, the higher education industry remains incompletely understood. Among the topics related to higher education that invite further research are the rapid increase in college costs, the interaction of tenure and the end of mandatory retirement, and the effects of college enrollment on income inequality. Data from surveys of freshmen suggests that the gap in socioeconomic status between students in private universities and other young people has grown over time.

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Higher education is an industry where markets don't clear, prices on average cover less than a third of production costs, the resulting student subsidies are given in strikingly different amounts by different schools, creating a sharply hierarchical market. And an input important to production can be bought only from the firm's own customers. This paper describes the resulting structure of costs, prices, subsidies, and hierarchy using an augmented theory of nonprofits and 1995 national data to show their magnitudes and suggest their often significant implications. Public intuition and economic models of firms, industries, and welfare often yield distorted understanding and dubious public policies.

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The authors trace the origins of the key features of U.S. higher education today--the coexistence of small liberal arts colleges and large research universities; the substantial share of enrollment in the public sector; and varying levels of support provided by the states. These features began to materialize soon after 1890 when the 'knowledge industry' was subjected to 'technological shocks' that increased the value of research to industry and government and led to the proliferation of academic disciplines. The consequence was an increase in the scale and scope of institutions of higher education and a relative expansion of public-sector institutions.

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The authors provide background on the history and development of community colleges in the United States in the last half century and survey available evidence on the impacts of community colleges on educational attainment and earnings. They also weigh the evidence on the impact of public subsidies on enrollment at community colleges and explore some weaknesses in the current higher-education financing structure. Finally, the authors reflect on how students who have been responding to the rise in payoff to education are to be absorbed by our postsecondary training institutions.

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The system of academic tenure has come under increasing scrutiny. The authors provide a brief review of the tenure literature, discuss some recent tenure controversies, and present basic data on the percentage of faculty subject to the tenure system. The issue of tenure is discussed in terms of how the authority necessary to run a college or university is delegated. The authors believe that this perspective sheds light on some underlying reasons for why tenure differs from other forms of labor contracting and on the reasons for the relative importance of the tenure system in different parts of higher education.

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The author asks whether it is useful to view universities in a utility-maximizing framework and shows that university organizing virtually guarantees that the utility-maximizing model is the incorrect approach. He then discusses resource allocation issues at Cornell and reflects upon how concepts that are obvious to economists helped or hindered decision making at Cornell. The author hopes to convey not that economic concepts are irrelevant in operating a university, but rather that it takes a long time to explain to all the actors in the system why these concepts should matter and even longer to actually make them matter.

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The authors analyze in three steps the influence of the projected mortality decline on the long-run finances of the Social Security System. First, mortality decline adds person years of life which are distributed across the life cycle. The interaction of this distribution with the age distribution of taxes minus benefits determines the steady state financial consequences of mortality decline. Second, examination of past mortality trends in the United State and of international trends in low mortality populations, suggests that mortality will decline much faster than foreseen by the SSA's forecasts. Third, based on work on stochastic demographic forecasting, stochastic forecasts of the system's actuarial balance are derived, indicating a broader range of demographic uncertainty than in the latest SSA forecasts, and a relatively greater contribution to uncertainty from fertility than mortality.

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In this paper, the authors summarize the nature of the changes in the structure of the health-care industry. They focus on the markets for health insurance, hospital services, and physician services. They discuss the potential implications of the restructuring of the health care industry for competition, efficiency, and public policy. As will become apparent, this area offers a number of intriguing questions.

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This paper surveys the contributions of Nobel laureates James Mirrlees and William Vickrey to the study of asymmetric information in economics, particularly as they relate to problems in public economics. It discusses and interprets Mirrlees's work on optimal income taxation and relates it to previous work on optimal distribution of income, including that of Vickrey. It also describes Vickrey's fundamental contribution to auction theory and its importance for the more general field of preference revelation. It also includes an evaluation of the prize winners' work in other areas of public economics, particularly on optimal indirect taxation and marginal cost pricing.

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This article highlights recent developments in antitrust economics that have influenced the way the federal antitrust enforcement agencies analyze five issues: efficiencies from mergers, entry conditions, practices facilitating coordination, exclusionary practices, and the unilateral competitive effects of mergers.

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What is perhaps most curious about 'Say's law' is the continuing disagreement on its substance and to whom it should be credited. John Maynard Keynes summarized the law as 'supply creates its own demand' but it is now generally agreed that Keynes did not get it quite right. The author has been unable to ascertain who coined the term 'Say's law' but it appears to be a twentieth century appellation, preceding Keynes's use. John-Baptiste Say was certainly among the earlier writers to discuss the topic at length but so far as the author can determine, none of Say's contemporaries--including Say himself--credits him with having been first to enunciate its principles.

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The incentives that arise in markets with asymmetric information are illustrated in the classroom exercise presented here. Student sellers choose both a quality 'grade' and a price for their products. Initially, both prices and grades for all sellers are posted, and buyers select from these offerings. In this full-information setup, the market prices and grades quickly reach efficient levels that maximize total surplus. Next, although sellers continue to choose grades and prices, only prices (not grades) are posted for buyers to see when they shop. The grades and prices then fall to inefficiently low levels. The observed market outcomes in this exercise can stimulate useful discussion of asymmetric information, market failure, and remedies such as quality standards and warranties.

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Features (view in pdf format):
Recommendations for Further Reading (AEA members only)
Correspondence (AEA members only)
Notes

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