Cost Efficiency and Privatization at Public Universities in the United States

Abstract

This study examines the relationship between cost efficiency and privatization at 163 public research institutions in the United States between 2005 and 2015. We employ a spatial autoregressive (SAR) random-effects model and stochastic frontier analysis (SFA) to estimate the relationship between costs and four privatization variables: auxiliary enterprises as a percentage of total revenue, tuition and fees as a percentage of total revenue, private grants and contracts as a percentage of total revenue, and out-of-state freshmen enrollment. Public research universities exhibit 28.5% overall cost inefficiency over the time period studied, 85.6% of which is short-run cost inefficiency. The results further show a nonlinear relationship between cost inefficiency and three of the privatization variables. With the expectation of little to no increase in state support to public research universities, this study has implications for campus management and future research.