Four-Stage DEA Efficiency Evaluations: Financial Reforms in Public University Funding

Financial reforms in U.S. public higher education are well underway and are progressively replacing university enrollment based funding formulas with performance based models driven, in part, by graduation rates. Doing so, however, fails to account for the internal resource constraints and managerial efficiencies associated with production. Moreover, graduation rates are affected by external factors beyond the control of university decision-makers. This paper addresses these issues and uses a four-stage data envelopment analysis (DEA) model to evaluate university graduation rate performance. The four-stage DEA efficiencies correct for both environmental and statistical noise effects on university operations. Efficiency estimates control for the friendliness of the higher education operating environments as measured by differences in public financial support and educational quality. The results indicate that while universities are favorably efficient according to single stage estimates, additional efficiency gains of about three percentage points arise after accounting for good and bad fortune and external environmental effects. The number of efficient universities is found to more than double, thereby indicating significant shifts in the efficiency rankings of universities. Yet, better quality data is needed and should be forthcoming as universities and states gain greater experience with the implementation of performance based funding and ties to student success