Privatization and cost inefficiency at U.S. Public research universities

This study examines the relationship between cost efficiency and privatization at 163 public research institutions in the United States between 2005 and 2015. We employ a spatial autoregressive (SAR) random-effects model and stochastic frontier analysis (SFA) to estimate the relationship between costs and four privatization variables: auxiliary enterprises as a percentage of total revenue, tuition and fees as a percentage of total revenue, private grants/contracts as a percentage of total revenue, and out-of-state first year enrollment. Results showed cost inefficiency at public research universities increased between 2005 and 2015, even as reliance on private sources of revenue increased. Public research universities exhibit 28.5% overall cost inefficiency over the time period studied, 85.6% of which is short-run cost inefficiency. This suggests that most of the cost inefficiency varies across years and may be the result of challenges that institutional leaders face adapting to short-term fluctuations in market-oriented sources of revenue. The results also show a nonlinear relationship between cost inefficiency and three of the privatization variables. Given the expectation of little to no increase in state support for public research universities, this study has implications for policy, institutional management, and future research.