Cost Inefficiencies and Rankings of Ivy Universities: Stochastic Panel Estimates

This paper employs stochastic frontier analysis in providing estimates of the operating cost inefficiencies of private non-profit and public ivy universities in the U.S. Panel data for academic years 2005-09 is used to estimate cost frontiers under two alternative specifications that lead to estimated gross and net inefficiencies. Time varying inefficiencies are reported for each academic year and used to calculate university inefficiency rankings by sector. The results suggest that private ivy universities are less inefficient or more efficient than their public counterparts. However, public ivies appear to have made significant inefficiency adjustments perhaps in response to the global financial crisis. Absent those adjustments among the private ivies, the inefficiency gap between the two sectors is found to have substantially narrowed. This paper provides operating cost inefficiency estimates for ivy universities in the United States. These universities include the prestigious private ivies and the public flagship universities that have been similarly crowned (Greene and Greene, 2001) on the basis of academic quality. Although these universities individually carry different academic strengths, as a group they comprise, but also omit, some of the most elite universities in the U.S. Many are world renowned and attract students, faculty, and research and other financial support from an international market and produce some of the world's leading scientists, historians, and business leaders. Regardless of their private or public ownership status, they are financed by private and public dollars through tuition charges, research support, and philanthropy. At one time or another, financial donors from all camps have been critical of the university management of these funds. Since the global financial crisis, accelerated interest in managerial reforms, especially in the public deficit ridden sector, has brought new criticism and pressure to bear on these institutions. From a number of perspectives these institutions are increasingly expected to be managed in a cost efficient manner. Moreover, with the growing interest in public management reform, there is expectation that there should not exist significantly detectable cost inefficiency differences between institutions in the private non-profit vs. publicly owned sectors. Stochastic frontier analysis offers a robust methodological approach to the estimation of institutional and managerial cost efficiencies or, rather, inefficiencies. Based on certain distributional assumptions, the analysis is used to measure the extent to which universities, or more generally firms, operate at or above their minimum potential cost. The greater that deviation, the greater is the cost inefficiency. Using panel data for the four academic years, 2005-09, stochastic cost frontiers and inefficiencies are estimated for both private non-profit and public ivy universities. Using the distinction between gross and net inefficiencies, tests are conducted to determine the appropriateness of university characteristics entering as inefficiency determinants or as cost determinants. In addition to the estimation of aggregate private-public inefficiency differences, the dynamics associated with the time varying inefficiencies are reported for each academic year. In a final analysis, university mean inefficiencies are calculated and used to provide overall rankings and a comparison to individual academic year rankings in an attempt to derive conclusions