Should universities be subsidized? â€“ A reference point view
AbstractBecause of the central importance of higher education and its long-turn positive extern effects on the whole society, the government often might wish to enforce its will on the universities through the subsidy it provides to them. Thus the question arises: what are the welfare consequences of state subsidies offered to universities? I try to answer this question with the recently developed tools of the so-called reference point theory, established by Oliver Hart and his coauthors. In my model the two participants are the government and the university. The university is controlled exclusively by a rector and the representative of the government is the administrator. The objective of the administrator is to maximize public welfare, whereas the rector maximizes her own payoff. The administrator offers a subsidy that comes together with the obligation to fulfill the state's instructions. Since these â€˜handcuffsâ€™ are usually against the rector's own interest, but subsidy is valuable to the rector, there is a tradeoff. I investigate the optimal behavior of the rector in two cases: a private university and a state owned public university. In spite of the simplified assumptions, this setup undoubtedly shows the ambiguous nature of subsidies.
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Bibliographic InfoArticle provided by MIR Center for Socio-Economic Research in its journal International Journal of Economics.
Volume (Year): 1 (2014)
Issue (Month): 1 (January)
Higher education; Private university; State university; Subsidy;
Find related papers by JEL classification:
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
- L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out
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