Higher Education 4 (1975) 77 86 �9 Elsevier Scientific Publishing Company, Amsterdam - Printed in the Netherlands

A CONSPICUOUS P R O D U C T I O N T H E O R Y OF R E S O U R C E A L L O C A T I O N IN H I G H E R E D U C A T I O N

MAW LIN LEE, DAVID W. STEVENS, RICHARD L. WALLACE

University of Missouri-Columbia, Columbia, Missouri, U.S.A.

ABSTRACT

Despite well-founded predictions that the 1970's and 80's would be character- ized by excess capacity in graduate education, new graduate programs have continued to appear and existing programs have expanded capacity. This paper proposes a utility maximization theory to explain the continuation of the growth process and describes the nature of the public policy which will be necessary to effect changes in resource allocation in higher education.

The basic hypothesis of the theory presented in this paper is that utility maximization of decision makers in higher education is functionally related to minimi- zation of the gap between desired and prevailing institutional status. In an operational sense, status depends on an institution's factor complement, i.e., the institution's instructional and research programs and the quality of faculty and other inputs used to operate these programs. This implies that factor complements provide utility to decision makers in addition to their actual contribution to the educational process. Recognition of this factor and the oligopolistically interdependent nature of the decision making process in higher education is essential for the formulation of effective public policy to induce necessary reallocation of resources to graduate programs.

I n t r o d u c t i o n

Beginning in the early 1960 's wel l - founded pred ic t ions were widely

disseminated that the 1970's and 80 's would be character ized by excess

capaci ty in graduate educat ion. Despite these warnings, new graduate

programs con t inued to appear and existing p rograms expanded capacity.

In 1970, Allan Cart ter conc luded that " . . . we have created a graduate

educa t ion and research establ ishment in Amer ican universities tha t is

abou t 3 0 - 5 0 percent larger than we shall effect ively use in the 1970 's and

early 1980's and the g rowth process cont inues in m a n y sectors ," (Cartter, 1970, p. 2)

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The purpose of this paper is to present a theory which explains why the growth process continues, and to indicate why the types of reallo- cation urged by Cartter and others are inadequate to accomplish necessary changes in higher education. We recognize the need to test the theory proposed here, but have opted at this stage of our own work to present the hypothesis about decision processes in higher education, in the hope that others will join us in refining and testing the theory.

Briefly, a utility maximizing theory of decision making is pro- posed, 1 which is particularly useful in explaining "conspicuous" re- source allocation patterns in higher education. Deficiencies of profit- maximizing theory in this respect are noted, so the reader is immediately alerted to our purpose in presenting an alternative theory which is thought to yield a more plausible explanation of observed behavior, and therefore is thought likely to have greater predictive value.

No at tempt is made to present a comprehensive theory of decision making in higher education. Instead, the more limited objective is to introduce a new perspective on selected aspects of this decision making process, in the hope that this approach will further the development of more effective policies toward resource allocation to, and within, higher education.

A Theory of Decision Making

Underlying the model presented in this paper is the premise that decision makers in higher education strive to maximize utility. The useful- ness of substituting a utili ty maximization assumption for profit maximization has been seriously challenged in the case of profit-oriented firms, but the assumption is useful in explaining the behavior of non- profit institutions. 2

A decision maker's utility function is defined here to encompass all variables which affect his well-being, e.g., income (I), prestige (P), profes- sional satisfaction (S), and job security (J). Thus, for any decision maker,

U= U(I,P,S,J, . . .). While these variables depend on numerous other factors, the work of

organizational theorists indicates that an important common variable is

1 The structure of the theory derived here bears little resemblance to that presented in Culyer (1970), even though both incorporate a utility maximization assumption. 2 For a test of the assumption in the case of profit oriented firms, see Kamerschen (1968). For another use of the assumption in the case of non-profit institutions, see Lee (1971).

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the prestige and status of the organization with which the decision maker is associated. 3 This implies that the utility of a decision maker in higher education is a direct function of the prestige and status of the institution in which he serves. Thus, for the objective function, it is assumed that as decision makers in higher education at tempt to maximize utility, they will strive to improve the status of the institutions in which they serve. Such an assumption is also consistent with the view that communities, state legislatures, and the controlling bodies of private educational institutions are directly concerned with the status of the institutions for which they are responsible. In this case, decision makers are charged with enhancing institutional status and their contributions to the institution are judged accordingly. In this case, too, the utility of decision makers would vary directly with the status of their respective institutions.

As a result of such behavior, there are forces of competi t ion at work in higher education - but for status, not profits. Status is an abstract concept which cannot be measured precisely, and for this reason, there are not necessarily clearly defined boundaries between institutions in differ- ent status groups. Nevertheless, it is argued here that institutions of higher education can be ordinally ranked from those in very high to those in very low status groups and that major activities undertaken by the institutions in the different status groups will differ in discernible ways. In general, the higher the status of an institution, the higher is the quality of its faculty and students, and the larger is the proport ion of resources devoted to research and graduate programs. Faculty in higher status groups nor- mally publish more, are paid higher salaries, have fewer class contact hours, and generate more soft money support. Thus, these activities and characteristics, which are the visible signs of status, become the primary concern of education decision makers in their a t tempts to maximize utility.

Thus, the basic hypothesis of the conspicuous production theory is that decision makers in higher education strive to minimize the gap between desired institutional status (S*) and prevailing status (S). That is

minimize (S*-S), where S* >_ S. (1)

Three aspects of the hypothesis should be noted. First minimi- zation of the status gap implies maximization of utility on the part of institutional decision makers. Second, the reason for proposing a defensive postulate is that educational institutions frequently justify their activities on the ground that other institutions are undertaking similar activities - they must emulate other institutions in order to maintain their relative

3 For exemple, see Barnard (1968), Simon (1965), and Thompson (1961).

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status. Third, the requirements necessary to stay within a particular status class will change over time. Such changes will occur as a result of factors which are both endogenous and exogenous to the higher education sector.

The second important postulate of the model is the relationship between inputs and status. The status of an institution is assumed to depend on the activities in which it engages and the factor complement it is able to acquire, e.g., faculty publications and percent of effort devoted to research and graduate programs. In short, resource allocation decisions and factor complement priorities are established toward minimizing (S*-S), rather than toward pursuit of least-cost production of a given quality graduate. Since for each status group at a particular time there is a unique, albeit broadly defined, factor complement corresponding to that status, the assumption that an institution at tempts to minimize the gap between its desired and actual status may be restated as:

minimize (FC*-FC), where FC* >_ FC 4 (2)

where FC* represents desired factor complement and FC denotes the present composition of these resources and activities; subject to the budget constraint

E<_R (3)

where E is institutional expenditure and R is institutional revenues. For relations (1) and (2) to represent an operational hypothesis of

decision making in higher education, the desired factor complement, FC*, must be specified. This specification is based on the assumption that every institution in a particular status group must meet the behavioral standards of other members in the group. This suggests that the desired factor complement for a given institution is a function of the current and expected structure of a subset ] of the set of all other institutions: s or

FC[ = I(FC/, FCp). (4)

In other w o r d s , the traditional postulate of oligopolistic inter- dependence is adopted. Arthur Ross' orbits of coercive comparison concept is descriptive of the emulative process envisioned here (Ross, 1948, pp. 53-70). The decision maker is assumed to be aware of the locus

4 It is difficult to conceive of a situation in which FC* <FC for institutional decision makers, but such a relation is not only possible, but highly probable, for state legislators from whom a significant proportion of the institution's budget is derived. The implications of this are explored below. s This functional relation would be expected to include weighting factors to represent the relative importance of maintaining equality, or a specified advantage or dis- advantage, vis ?t vis particular institutions.

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of effective pressure and represents these interests in his administrative actions. When it is thought that these disparate institutional interests will allow an offensive strategy the objective of which is either to gain an

advantage within the prevailing orbit of comparison or to move into a more desirable orbit, such a move will be initiated. Success in this endeavor will set off a defensive chain reaction among all other institu- tions which include the first in their orbits of comparison. Since there is no reason to expect symmetrical interdependence, the emulative ripples would normally be expected to spread throughout the institutional set.

There are three additional factors which contr ibute to this emulative behavior. First, the academic market is such that recruiting is undertaken on a national basis, and there is high mobility of faculty among institu- tions and regions. In order for an institution to maintain its relative status it must respond promptly to changes in the monetary and non-monetary rewards being offered by competing institutions. Second, there is a very rapid flow of information among institutions of higher learning. When an institution introduces a new program, receives a research grant, etc., this information spreads to other institutions very quickly. Third, there is interaction between status gap minimization and the budget constraint. For example, the level of contract and grant support flowing to an institution will be directly related to institutional status as perceived by funding agencies. To be effective in the competi t ion for these funds an institution must emulate the factor complements of the higher status institutions.

The theory described above suggests tha t decision making in higher education is based on traditional optimizing principles derived in the theory of the firm, and the first- and second-order conditions for optimi- zation therefore apply. However, since the motivation in higher education is minimization of a factor complement gap, rather than profit maximi- zation, the results are quite different.

Implications of the Model

The pivotal assumption underlying the conspicuous product ion theory of resource allocation in higher education is that, while status is an abstract concept, discernible ordinal groupings can be identified. This concept of a hierarchy of institutions in which subsets can be ranked ordinally on the basis of institutional status, suggests a diffusion process

ini t iated by the altered factor complement in a single prestigious univer- sity. The other institutions in this university's status subset will adopt a defensive posture and respond in an emulative fashion to introduce the

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same change in their own factor complements. This is the orbit of coercive comparison in action. In addition, there are likely to be institutions in subsets of lesser ordinal rank which aspire to higher status. Given the opportuni ty, e.g., through a relaxation of the budget constraint, such institutions will realign their factor complements. Thus, a single exogenous force may initiate a condition of disequilibrium which will eventually diffuse throughout the system. One would predict, for exam- ple, that a reduction in the number of class contact hours at a prestigous university would, albeit with significant lags, have a trickle-down effect throughout higher education.

An important example of this diffusion process is the experience in US higher education during the decade of the 60's. The exogenous change most readily identified would be Sputnik I, launched in the fall of 1957. The direct result of this occurrence was a significant change in the demands made on higher education. There was a significant increase in the demand for personnel trained in technology and research and for research output. The US Congress, through increases in appropriations to existing Federal agencies, and new units such as the National Science Foundation, provided a clear manda t e ' t o higher education to reorient its objectives toward the education of technical personnel, especially those in pursuit of advanced degrees, and toward engagement in research activities on an unprecedented scale.

As educational institutions expanded their educational and research programs, there was a significant increase in the demand for advanced degree holders within the educational sector.

As a result there were sharp increases in salaries of technologically and research oriented personnel, and many employers were unable to find qualified employees at prevailing, or even higher, wage rates. However, in higher education, the impacts of these factors differed substantially between higher and lower status institutions.

Higher status institutions, which were already devoting a large pro- portion of their resources to research and graduate programs, were able to respond very quickly to the exogenous change by expanding these pro- grams. Since a sharp increase in the flow of government funds accom- panied the expansion of demand for research and educational programs, the higher status institutions were able to meet, and indeed contributed to, the rapid increase in salaries. These institutions never suffered from a shortage of Ph.D.'s. However, there was a sharp reduction in the number of Ph.D.'s available for lower status institutions. As a result, the rapidly growing disparity between the factor complements of lower and higher status institutions disturbed the equilibrium that existed among institu- tions of higher learning. Since FC* is partially a function of the actual

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factor complement observed among a subset of other institutions, 6 any change in the factor complement of one or more institutions will set off defensive responses by other institutions in their orbits of coercive com- parison.

Under these circumstances, institutions whose desired factor com- plements had changed not only took offensive action to benefit from the exogenous change but also initiated defensive action to maintain their relative status. This emulation may be characterized as conspicuous pro- duction for the reason that the factor complements of higher status institutions are ill-suited to the mission of lower status institutions. Indeed, an important consequence of defensive interdependence is that factor acquisition will occur that is at worst unrelated and at best only peripherally related to the educational missions of particular institutions. For example, predominantly undergraduate institutions and teacher's colleges initiated graduate programs and emphasized research. Publications were emphasized and teaching loads were reduced. However, a strong c a s e

c a n be made that such changes have added little to the productivity of these institutions in terms of their undergraduate teaching mission, the training of graduate students, or in research output. In fact, the primary impact has been to increase the costs of these institutions.

The capacity of graduate training programs was expanded beyond the level necessary to replenish the now larger stock of technically trained and research oriented personnel. Both because of the lags involved in increasing the output of such personnel and the existence of a stock-flow relationship, the problem of excess capacity did not become immediately apparent. The stock-flow phenomenon is simply the traditional accelera- tion principle in operation. Qualitatively, conspicuous production may have resulted in deterioration in undergraduate teaching, at least in the short run, and the production of poorly trained graduate students. Research oriented faculty members were hired to fill what had been primarily teaching positions, and there are reasons to doubt that the new graduate programs could produce adequately trained graduates. The newly created graduate programs were inadequately staffed because of the "shortage" of Ph.D.'s, and they attracted a high proportion of students with marginal qualifications.

The discussion above suggests that conspicuous production resulted in misallocation of resources, and this raises the question why did state legislatures and boards of trustees allow colleges and universities to pursue these policies. There are several facets to the answer. First, there was a

6 This subset w o u l d be e x p e c t e d to consis t o f ins t i tu t ions in the same and neighboring status groups.

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broad based interest extending from governors and state legislators, through governing boards and others, in the status of educational institu- tions. All these groups were interested in participating in the new mandate to higher education, and they wished to compete for a portion of the largesse flowing from Washington.

Second, the production of graduate education is largely financed through third-party sources which contributes to a relatively permissive environment in which objectives other than cost minimization can be pursued. Third, the existence of price discrimination between undergraduate and graduate programs facilitates a greater degree of latitude in factor acquisition than would be the case under a marginal cost pricing strategy. Fourth, the ill-defined and heterogeneous nature of graduate education and research programs makes it difficult to define an appropriate relation- ship between inputs and outputs. Fifth, despite the fact that the exogenous change in the late fifties was a temporary disturbance, the adjustment took place as though it were a natural consequence of economic develop- ment.

Policy Implications

The current problems in higher education are analogous in many ways to those of the airframe industry. Capital investments have been made over the last ten years in a human resource complement that is no longer validated by effective demand. The airframe industry has ratio- nalized its resource base through extensive layoffs which externalizes the problem. In higher education, however, academic tenure and virtually irreversible decisions concerning the productive mechanism such as class contact hours, research institutes, and curricular structure compound the problem. The evidence of institutional rigidities in the face of a radically altered environment that has been documented in recent reports by the Carnegie Commission, the Ford Foundation task force, and the American Council on Higher Education is consistent with this model. However, the recommendations of these prestigous groups are inadequate precisely because they fail to recognize the interdependent nature of the decision process. In addition, these reports have not adequately addressed the problem of providing a positive incentive mechanism for achieving the painful adjustments required of higher education during the 1970's. The production lags, institutional rigidities, and emulative behavior patterns of the present system necessitate a comprehensive effort at coordinated planning. These characteristics of the present system render ad hoc efforts to realign the resource allocation pattern ineffective.

Because of the particular nature of the decision making process, the initiative for realigning factor complements will not come from within higher education. Under the institutional setting created by Sputnik I, measures taken to correct distortions in factor complements would reduce

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the ut i l i ty o f decision makers in higher educat ion . F o r this reason, an appropr ia te set o f incentives mus t be def ined to compensa t e for these losses. In addi t ion, a coo rd ina t ed e f fo r t must be made to al ter the ins t i tu t ional setting.

F o r example, if demand and supply suggest tha t there is excess capaci ty in Ph.D. programs and if it is decided that marginal programs should be el iminated, " d e p a r t m e n t a l dis integrat ion grants" might be o f fe red to specified inst i tut ions. Adminis t ra to rs could be o f fe red supple- menta l suppor t in amoun t s to be de te rmined by the rigidity and di rec t ion o f rea l locat ion o f these resources away f rom the p r o d u c t i o n o f Ph.D. 's

toward such activities as improved unde rg radua te ins t ruct ion. Since the_acquisi t ion o f resources f rom channels o the r than the state

appropr ia t ion and s tudent fees has becom e a significant d e t e rm in an t o f facu l ty behavior, founda t ions and federal agencies might cons ider the purchase o f facul ty t ime to be spent in the unde rg radua te c lassroom! "Re lease t ime" in this case, would provide a posi t ive incent ive to r e tu rn to the classroom. This, o f course, assumes that the flight f rom the classroom during the 60's was evoked by the exogenous forces descr ibed in Sect ion II which realigned the internal ins t i tu t ional reward sys tem to favor non- teaching endeavors.

Al though we feel the consp icuous p r o d u c t i o n t h eo ry provides a sa t isfactory exp lana t ion o f resource a l locat ion in higher educa t ion , it mus t be cons idered as tentat ive. The impl icat ions o f the t h eo ry should be tested, and con t ras ted with the impl ica t ions that would resul t f r o m the appl ica t ion o f a " m o r e conven t iona l " e c o n o m i c mode l to higher educa- t ion. Yet, in part , it is diff icult to unde r t ake such a compar i son fo r it is no t a l toge ther cer ta in to what the consp icuous p r o d u c t i o n t h e o r y should be compared . Despi te a n u m b e r o f efforts , there is no generally accep ted t h e o ry o f resource a l locat ion in non-prof i t ins t i tu t ions in general no r in higher educa t ion specifically. 7 It appears to us tha t mos t recent studies o f

7 Even though there is no accepted theory of resource allocation for institutions of higher learning, there remains the possibility that the traditional theory of the firm will serve the purpose. But, surely no one contends that universities maximize profits and that all aspects of the conventional theory of the firm are appropriate for explaining resource allocation in higher education. To propose such a hypothesis is clearly inconsistent with the fundamental reason for the public sector status of higher education. It was precisely for the purpose of avoiding the implementation of the marginal revenue-marginal cost calculus that universities have been established as non-profit, public sector institutions. This is not to imply that the conspicuous production theory assumes irrational behavior. On the contrary, given the goal of status gap minimization, the theory states that resources within the university are allocated rationally toward that goal. But in contrast to profit maximization, parti- cular factors and particular outputs make a contribution to status in addition to their contributions in a traditional input-output sense. These contributions will be taken into consideration in determining output mix and use of factors.

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higher education have only surveyed the use of resources within the sector, estimated future demands for the products of the sector, and recommended changes that must occur if these future demands are to be met. These efforts are essential in that they provide necessary information for policy making, but our purpose is different. We have a t tempted to develop a behavioral model which provides a rationale for present resource allocation patterns and for designing policy measures to bring about the changes which are deemed desirable.

Acknowledgements

The authors wish to thank their colleagues, Russell Bauder, David Kamerschen, Wayne Leeman, and John Murdock, for useful comments and suggestions. Responsibility for the final paper lies with the authors.

References

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Culyer, A. J. (1970). "A Utility Maximizing View of Universities," Scottish Journal o f Political Economy, 17.3 : 349- 368.

Kamerschen, David R. (1968). "The Influence of Ownership and Control on Profit Rates." American Economic Review 58. 3-1 : 432-447.

Lee, Maw Lin (1971). "A Conspicuous Production Theory of Hospital Behavior." Southern Economic Journal 38.1 : 48-58.

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