Effects of Financial Source Dependency on Public University Operating Efficiencies: Data Envelopment Single-Stage and Tobit Two-Stage Evaluations

Managing publicly owned universities has necessitated year after year adjustments to shifts in the dependency on alternative financing sources. The global financial crisis bought new managerial operating challenges with an accelerated decline in government funding and a quick evaporation of investment income. But, in many cases, regulatory constraints prevented offsetting tuition increases. This paper investigates how differences in university finances potentially affect operating efficiencies. The analysis uses panel data on 331 universities for academic years 2005-2009. Because finances are only partially under the control of university management, they are treated as quasi environmental in the implementation of data envelopment estimation of efficiencies. Single stage DEA estimates are, therefore, generated with university financial environments included under one model and excluded under another model. Results are compared to a Tobit two-stage analysis in which first-stage efficiencies are used along with financial environments. Findings indicate that greater tuition dependency promotes inefficiency while increased government funding yields efficiency gains. Investment income also appears to have a slight negative effect, albeit statistically weak. Despite recent financial shocks, the results reveal public university efficiencies have improved over time.