Reform, Not Rankings?

Should Princeton Review be alarmed?  The federal government is getting into the college ratings business.  The President yesterday announced a proposed system for rating colleges’ cost-effectiveness, and tying federal loan subsidies to the resulting rankings.  If you think the problem is that colleges have no incentive to cut costs, it makes some sense.  But the implementation has serious question marks, not the least of which is that someone in the government will have to decide how much more expensive it ought to be to train, say, engineers vs. poets.

What about nonprofit governance reform instead, or maybe also?  In my last few posts, I’ve sketched our findings that university dependence on donations tends to restrain executive compensation.  We also find a strong correlation between pay and tuition.  By itself, that correlation doesn’t really tell us anything about causation.  But in combination with our detailed findings about donor influence, it begins to seem more likely that presidents may prefer to emphasize tuition in order to reduce their dependence on donors.      

That isn’t exactly iron-clad proof.  But it’s at least suggestive.  Reforming executive compensation might not give colleges incentives to hold down student costs, but it at least could diminish their executives’ interest in letting costs rise.     

Could we tell the same story about law schools?  It’s possible---we don’t have much data about private law school deans---but keep in mind the environment is different.  Only a handful of law schools get any significant fraction of their operating budget from donations.  So I don’t think the story we tell quite translates.  That’s not to say there aren’t agency problems in law schools, just that they probably take a different form.