Economics of Higher Education Productivity

How does spending affect academic outcomes in higher education institutions? Postsecondary schools incur costs to provide services to its student body. In this study, I introduce multiple outcome variables, a two-stage production function, and current-year expenditures on core services to evaluate how school spending affects academic outcomes. The empirical analysis includes 28 group sample parameter estimates from four outcome variables, the pooled sample, and group samples for each of six sectors. The fixed effects/instrumental variable (FE-IV) instructional expenditure parameter estimates were positive for 20 of the 28 group samples. The sign and size of the estimated academic output effects varied substantially based on the outcome variable and higher education sector. Output effects typically ranged from 0.1 – 0.3% per 1% increase in instructional expenditures. The empirical results generated negative parameter estimates for most group samples for institutional support and research spending, and mixed results for academic support and student service expenditures. The empirical results from this study leads to several conclusions. First, increased instructional expenditures can improve academic outcomes, and the outcome effects vary significantly by sector. Second, the effects of increased spending on degree completions vary significantly based on school type. Third, there are multiple ways to effectively measure academic outcomes. Fourth, spending reallocations from services such as institutional support or research to instruction can increase completion rates and academic productivity for schools in most sectors