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The Inmates Running the Asylum?

trying to limit Food Stamp use to approved stores, the government looks for cases of fraud and prosecutes them.155

The market is indeed capable of performing the quality certification function for a vast array of prod- ucts and services. For example, there is no need for a quasi- governmental agency to certify the quality of restaurants (there are health inspectors, but they only establish whether the restaurant follows health codes, they do not pass any judgment of the quality of food served). Consumers can go wherever they wish, and through a combination of direct experience with the product, communication with others that have direct experience, and independent third party reviews, make informed decisions about which product to buy. Restaurants that provide higher value can be expected to displace those that offer lower value. A similar mechanism is at work in “certifying” quality for any number of other products, from cars to magazines.

If this same mechanism functioned with higher education, there would be no problem with relying on the market to certify quality. However, higher education has a number of relatively unique character- istics that complicate the issue. To begin with:

It is virtually impossible to know the true quality of an undergraduate degree: the stu- dent purchases the service only once, participates in the provision of the service, the service provided is a capital asset, there is no secondary market for degrees, and the value of the degree may not be known for years after it is purchased.156

All of these distort the information that prices signal in a well functioning market. Adding to the con- fusion is the non-profit or public status of most institutions, the principal-agent problem, peer effects, and college as a status good.157 All of these conspire to cloud informed decision making. We therefore have little confidence in the ability of the market to send the appropriate signals about college quality, at least beyond the extent that is currently in practice by popular college guides and rankings systems.

We would note, however, this is not truly an example of “market failure.” Markets operate efficiently when information on alternatives is widely available at low costs, and that is not true with colleges in large part because they conspire to NOT provide information that would be of great interest to consumers: information about educational services and even about those who are funding those services.

If the market is unable to enhance informed decision making, then we are likely to see a significant deterioration in the certification of quality in higher education. For all of its flaws, accreditation is fairly effective at marginalizing diploma mills, and this result would be lost once the market was put in charge of certifying quality. In its place, we would likely see a free for all of fly by night schools trying to grab federal funding in a marketplace unable to distinguish among high quality colleges and diploma mills.

Would Such a System Be Appropriate? Overall, the importance of the quality certification role and the significant deterioration that we would expect to see leads us to conclude that this is not a desirable alter- native. If at some point in the future, reliable measures of student learning are devised, this would allow for direct determinations of college quality to be made. It would then be feasible and appropriate to rely on the market. Moving to that goal should be an aim of policymakers. But until there are measures of student learning publicly available that allow for direct comparisons of colleges, relying heavily on the market is inadvisable.

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