Why are Most Universities Not for Profit?

Abstract

We survey and evaluate explanations for the widespread use of the non-profit form in higher education, including the subsidies hypothesis, the donative hypothesis, efficient faculty monitoring, the trust hypothesis, and the reputation hypothesis. We confront the available hypothesis with the evidence on the observed cross sectional variation between for-profit and non profit educational institutions. For profits are in fact wide-spread in higher education, although they do not have a strong presence in the high quality end of the market. We find strongest support for a dual hypothesis of maximizing the efficiency of reputational certification and attracting donations. Non-profits certify the reputation of the high quality students and faculty, rather than the individuals willing to pay the most. Donations then are used to maintain the pecuniary value of the institution.

JEL Classification: L3, H32