Shireman: Public and Nonprofit Higher Education as Optimal Second-Best
A reporter who covers Wall Street recently asked me whether the for-profit college industry has hit bottom yet. She meant the stock price, but my mind went immediately to the predatory behavior—aggressive and misleading marketing and low-quality programs leading hundreds of thousands of students into crippling debt—that has plagued the industry. Those egregious practices were at their worst precisely when the stock prices of for-profit colleges were at their highest. And therein lies the market failure that burdens for-profit higher education: While in other industries consumer value and shareholder value can move in tandem, with products and services like education, the guiding light of the enterprise—the stock price—can lead to the worst outcomes for students.
Education exhibits a problem known as contract failure, in which the buyer cannot reliably evaluate the quality of the promised or provided product or service. As a consequence, profit maximization fails to produce optimal outcomes because the profit-seekers’ drive to overpromise and underdeliver is rewarded rather than punished by the market, causing other firms to emulate the bad behavior. The problem becomes particularly severe if the firms target the least sophisticated or most desperate customers, those who are least able to evaluate the quality of the service provided. Contract failure is common in enterprises with ambiguous goals like building character, developing critical thinking skills, or spiritual fulfillment, or in industries involving vulnerable populations like children (schools) and the elderly (nursing homes).
Lloyd Mayer