New Estimates of Economies of Scale and Scope in Higher Education

Following Cohn, Rhine, and Santos (1989), we reestimate cost functions for 1492 private and 1450 public institutions of higher education (IHEs) in the United States, using data for fiscal year 1995-1996. Costs are modeled as a function of the level of production of three outputs: undergraduate education, graduate education, and externally funded research. We find that public and private IHEs are characterized by significantly different cost functions. At the sample means of the variables, we estimate that public and private IHEs enjoy both ray economies of scale and product-specific economies with respect to production of all three outputs. However, we also find that, at the sample means, both public and private institutions are characterized by diseconomies of scope in the production of these three outputs. Our findings suggest that both public and private IHEs could reduce their unit costs of operation by growing relative to the current mean levels of production.