Managing Operating Efficiencies of Publicly Owned Universities: American University Stochastic Frontier Estimates Using Panel Data

This paper investigates the extent of operating cost inefficiencies in the public provision of American higher education. The analysis employs panel data on American research and doctoral granting universities spanning four academic years, 2005-06 through 2008-09. Translog cost frontiers are estimated under two alternative efficiency models whereby institutional specific environmental factors affect university operating inefficiencies on the one hand and cost frontiers on the other. Results support the notion that inefficiency effects are not to be ignored in modeling the cost structure of American universities. Moreover environmental factors affect university operating efficiencies. University operating inefficiencies are found to have increased over time, but the rate of growth slowed substantially in the 2008-09 academic year. That could be an early managerial response to budget cuts driven by the financial crisis. Rankings based on individual university performance indicate fairly wide inefficiency variability and some flagship universities residing among the more inefficient institutions. With growing interest in public management reform, the paper should be of interest from both perspectives of public policy and managerial decision-making.