NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Ranking Affects the Financial Resources of Public Colleges

"College quality ranking information leads to increases in expenditure in public colleges, most of which are funded by more state appropriations per student. State appropriations per student are more responsive to USNWR rankings exposure if a state has more citizens who are politically active, care about higher education, and buy USNWR from the newsstand."

It is widely believed that the United States has the highest quality system of higher education in the world. However, some statistics are alarming: despite the rapid rise in tuition and heavy subsidies from government and private contributors, only 54 percent of freshmen graduate with a bachelor's degree within six years. This gives rise to a long-standing question: how do we motivate colleges to achieve and maintain quality?

Ranking colleges and other non-profit services, though difficult, has become increasingly popular. Quality rankings feature prominently in national magazines, and some governments even construct and publicize "quality report cards" for hospital care and education. Of course, the national magazine rankings have the potential to reach a much larger audience than simply prospective consumers. And, while better-informed consumers may motivate for-profit firms to lower prices and/or to improve quality, the rankings of non-profit services may deliver new information to their contributors as well, and thus reshape the behavior of non-profit firms via a different channel.

Every fall, the U.S. News & World Report (USNWR) publishes its "America's Best Colleges" issue, generating an enormous debate about the pros and cons of college rankings. The wide circulation of the USNWR college rankings issue reaches a much larger audience than prospective students alone. The "America's Best Colleges" issue drives up USNWR's typical newsstand sales by 40 percent, reaching an end audience of 11 million people.

Since virtually all four-year colleges (including universities) in the United States are non-profit, contributions from governments and private donors account for more than half of their total revenue. This is especially true for public colleges, where the state government is the largest contributor (40-50 percent of the total revenue) and tuition payments are small (15-17 percent of total revenue). The non-consumer audience for rankings of public colleges thus ranges from state governments that are directly responsible for allocating appropriation funding to public colleges, to college alumni who value the reputation of their former school, to the voting public who may not attend college but have a keen interest in higher education because of the positive spillovers from educational attainment. These audiences all directly influence the amount of financial resources allocated to colleges, and their preferences may be reflected in tuition policy, admission criteria, the profile of the faculty, and campus activities of a college.

Thus, college rankings have the potential to steer colleges towards quality improvement, but does it work? In The Power of Information: How Do U.S. News Rankings Affect the Financial Resources of Public Colleges? (NBER Working Paper No. 12941), authors Ginger Zhe Jin and Alex Whalley focus on public colleges and examine the impact of USNWR rankings on a college's financial resources per student. The authors ask to what extent and through what mechanism college rankings work. They find that college quality ranking information leads to increases in expenditure in public colleges, most of which are funded by more state appropriations per student. State appropriations per student are more responsive to USNWR rankings exposure if a state has more citizens who are politically active, care about higher education, and buy USNWR from the newsstand.

A number of caveats underlie these findings, though. For example, the funding increase in response to the USNWR exposure may affect college output, since recent research has shown that college completion rates are positively related to resources per student. However, another study has shown that accountability awards to secondary colleges in California have little impact on student achievement. So, the authors suggest that a worthwhile extension of their study would be to estimate the direct effect of USNWR ranking exposure on college completion rates. These estimates would be important in beginning to understand the implications of their findings.

Since financial resources per student represent only one dimension of college quality, another important avenue for future research would be to examine whether there is any evidence of a college "gaming response" to the rankings. If it is less costly to improve on-paper quality (as defined in the ranking algorithm), then USNWR rankings may distort college behavior away from improving true quality. To have a sense of whether this is an important concern, more extensive data is required, so that both true quality and on-paper quality can be measured separately. The response of alumni giving to the USNWR ranking exposure represents a possible case of such a response, since both the fraction of alumni giving and the total dollars donated by alumni are a component of the USNWR definition of quality, but the actual resources donated by alumni are much more likely related to college quality than the fraction of alumni donors.

The authors suggest that it is too early to draw any clear implications from their current findings. While they believe that responses in the financial variables they find represent real resources, and are not just manipulated statistics on paper, it is not clear whether the response of state appropriations is socially optimal. Because the pressure to improve comes from public attention to media news, state governments may react to improve the dimensions emphasized in the news (for example, expenditure per student), but do nothing or even reduce efforts in improving more obscure items, such as faculty research.

-- Les Picker

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