Thursday, September 12, 2013

Transfer Pricing Failure in Academia

One of the stories causing "lunchroom chatter" in our profession is the closing of the University of Florida's Doctoral program in Economics. Most of us are shocked because it has been a good program with some top notch scholars. But when you dig a little deeper, this appears to have resulted from perverse divisional incentives. It turns out that the department, which is in the Business School, generates much of its class credit hours and tuition money from students in the Arts and Sciences College. While revenues accrue to one accounting unit, the costs accrue to another. Evidently, the transfer price was set to zero. It might be in the university's best interest to keep it open, but this is not in the different academic units' interests.

BTW, my own institution has the opposite problem. The implicit transfer price is set so high that each academic unit jealously guards against their students taking electives outside of the college. As a consequence, virtually no social science majors in Arts and Science, or students from any other college for that matter, take any economics classes because our department is housed in the Business School.  (We do it by requiring elective courses to be in other departments of our college.)


  1. This is a problem that plagues many university programs where one college offers the degree and much of the coursework needs to take place in another college. Illustratively, in the preparation of math teachers the student is in the College of Education while the student needs to take math courses in the College of Arts and Sciences. As in the case of the Doctoral program in Economics at the University of Florida, if the course credit revenue follows the students major, the College of Arts and Sciences has no incentives to open seats or sections to the Education students. The Doctoral program at the University of Florida seems to have the same problem. To address this, the university needs to align the incentives with the behaviors of the colleges required for the program to continue and be seen as valuable by both colleges. This could be accomplished by sharing the tuition revenue generated such that the marginal costs the College of Arts and Sciences incur for serving the Economics students are covered by some portion of the tuition revenue, with any remaining tuition revenue provided to the Business School to offset the costs of providing doctoral advising for the students. This can be accomplished by direct agreement by the colleges or thru the Provost’s Office recovering all tuition revenue and dispersing to the colleges according to a formula. The latter solution introduces potential inefficiency into the system that may result in a net reduction of the tuition revenue shared between the colleges, as the Provost’s Office will likely charge for their services. As should be clear, from the example in this post, as well as the example I mentioned in Education, universities are not always good at attending to basic economic principles, such as aligning incentives at each level of the institution with desired behaviors of its employees.

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