Monday, March 9, 2015

Student fees and the resulting incentive structure

The following is, once more, my personal opinion and not necessarily that of my employer, colleagues, friends, family or pot plants. Also, I do not claim to be an expert on economics or education management.

Parts of the blogosphere that I am reading are discussing the phenomenon of students hiring ghost-writers to fraudulently provide them with essays they need to get credit in university, and even Ph.D. theses. One commenter provided a link to a nauseating article from 2010 in which an alleged ghost-writer describes his work.

Some commenters then and today have wondered why the professors and lecturers find it hard to identify the fraudulent papers, and why the universities do not throw the book at the cheaters. A few of the replies cite their heavy workload and suchlike.

But instead this made me think of the financial 'industry'. Imagine, purely hypothetically, you are a bank that wants to make a quick buck out of handing out mortgages to people who you know will not be able to pay them off and then selling them off, meaning that somebody else will be holding them when it all comes crashing down while you walk away with profit.

Of course, investors would not buy your mortgage package unless they believed that it was a good investment. So you turn to ratings agencies to rate the investment quality of your product. And here is the kicker: you, who are interested in getting good ratings, pay the ratings agency, which one assumes would have to be interested in being asked to certify for you again in the future. Not that anybody would behave in that fashion, haha, but if, purely hypothetically, they did behave like that, there would be a bit of a conflict of interest here, right?

And unfortunately I wonder if the same does not apply to universities that have to finance themselves mostly through student fees, either because they are private to start with or because they are public but the government has cut too much of their funding. A university is like a ratings agency for students, so what happens if they get paid per student? Every student who gets thrown out of a course for cheating is one fee-paying customer less. Every student who enrols at a different university because this one has built the reputation of being tough and demanding high standards of its students is one fee-paying customer less.

In a system financed by student fees, the incentives for the university would appear to work towards waving the students through no matter how bad they are or what they do. As I see it, either you practise grade inflation and shut your eyes or you will lose customers and thus your income and, in the long run, your job. I am not saying that it is quite as simple as that, because clearly there are other considerations such as the massive endowments of some elite universities in the USA, and some people will have a stronger backbone than others, etc., but still the incentive structure is a problematic one.

Incentives matter. They can make people misbehave who would, under a different incentive structure, have behaved in a perfectly moral fashion. In other words, financing education through fees instead of taxes seems like a tremendously bad idea to me, at least if we want to have a system in which the universities are highly motivated to penalise cheaters and to maintain high standards.

(Of course, libertarians and other free market faithful would assume and argue that it is in the interest of universities to crack down on cheaters because they need a good academic reputation. But still there are two things that the university wants: money and reputation. So what to do if there is a tension between the two? Consider: if you do not crack down you may potentially damage your reputation later if the fraud is discovered, but if you do crack down you are guaranteed to lose paying customers very soon. Do the math.)

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