Education Markets?

Box 5.1 Why Should the Policy Maker Intervene in Higher Education Markets?

At its best, higher education realizes individuals’ potential and meets the economy’s skill needs. But if higher education institutions and students are left to markets alone, this potential cannot be realized—for several market failures as discussed below.

Externalities arise because a student’s decision to pursue higher education benefits society as a whole, yet it does not take such consequences into account. For example, a higher education degree not only provides higher earnings and opportunities to the student but also benefits society—for example, by making the student a better citizen and a more involved parent. By not taking this social benefit into account, the student may acquire less education than what is best for society.

Some students may not have the financial resources to acquire higher education. These liquidity constraints detract not only from equity among individuals but also from economic efficiency, as the economy fails to realize its full productive potential. While the credit market could, in principle, mitigate short-term liquidity constraints, this market is imperfect. Student loans typically lack the collateral or guarantee required by lenders because students borrow to finance an investment embodied in themselves. Thus, if the student does not repay the loan, the bank cannot take possession of the student as it can seize a house, for example, when a mortgage is not paid back.

Since higher education offers complex “products” whose nature and quality are difficult to assess, the market is plagued with information asymmetries. Consider, for instance, a student interested in biology who is trying to choose an industry-oriented program. The student may not know which specific program, among the many available, provides that training. Even after locating a few such programs, the student may not be able to differentiate them—because, for example, the institutions do not provide information on graduates’ salaries and employment prospects. Even if the student knows which programs deliver high-paying jobs, it may not be clear whether this is because those programs attract very well-prepared students, or because they provide excellent training. And even if all this information exists and is easily accessible, the student may not be able to understand and use it. Further, the student may overestimate her prospects in a program by not realizing, for instance, that she is poorly prepared or ill-suited for it.

In a well-functioning market, programs command high returns when the skills they develop are relatively scarce in the labor market. As a result, at least some students gravitate toward those programs, thereby satisfying the economy’s needs. Information asymmetries on program returns and characteristics break this virtuous cycle. Further, a different kind of information asymmetries may prevent students from accessing high-paying jobs even if they choose high-return programs: vacancies might only be advertised to a narrow network of students and higher education institutions (HEIs); some HEIs might not promote their graduates in the labor market; or students might not be able to prove their command of the required skills. The latter happens, for instance, when a student who has the corresponding skills lacks a credential certifying them, therefore complicating both her job search and the potential pursuit of a longer degree.

Higher education markets display imperfect competition. Since setting up and running an HEI is costly, this alone can concentrate supply around a few providers with high market

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Box 5.1 Why Should the Policy Maker Intervene in Higher Education Markets? (continued)

power, particularly in small localities that can only support a few providers. Legal and regulatory barriers to institutions’ entry determine actual concentration. If barriers are low and entry of institutions and programs is easy, the market will be more competitive. Nonetheless, the fact that HEIs offer differentiated products (in aspects such as geographic location, program type and field, curriculum focus, academic rigor, and labor market connections) gives HEIs a certain degree of market power even under plentiful entry. For instance, in Latin American and the Caribbean, most students attend higher education close to home, thus giving local HEIs considerable market power. Also, governments generously subsidize tuition in public HEIs but rarely offer financial aid for students in private HEIs, thereby endowing public HEIs with considerable market power. Further, since the early 2000s, higher education enrollment has grown dramatically in the region and has attracted a “new” student, of low income and poor academic readiness (Ferreyra et al 2017), who was previously underrepresented in the system. This type of student, who has little information or familiarity with higher education, invites the entry of low-quality, high-price institutions and programs, thereby deserving close regulatory attention.

Such market failures justify policy intervention, particularly in the areas of terms of information, funding, oversight and regulation, and skill development pathways.

tool to address one problem may exacerbate others. For instance, more generous funding may not only increase SCP demand, as desired, but also encourage the entry of low-quality providers. Addressing this unintended effect would require the use of funding and regulation policies in a complementary fashion.

This chapter argues that program-level information is necessary for policy makers—who must regulate and oversee the programs—and for students—who need to make informed choices. Mere information provision is not enough; students must be engaged directly to ensure that they receive and process the information. Currently, higher per-student subsidies at public higher education institutions (HEIs) are provided to students in bachelor’s programs rather than SCPs. Further, no financial aid is provided to SCP students in private HEIs. These practices must be corrected to restore equity and promote skill acquisition. Oversight and regulation must eliminate the lowest quality programs and promote an environment where only “good” programs are supplied. Flexible pathways must be implemented to facilitate skill acquisition in blocks or modules, at the end of which students can obtain credentials leading to a degree, and to promote lifelong learning. Overall, the goal of policy should be to create a system in which program-level information is disseminated and used by students and policy makers alike, and in which policy makers monitor all programs closely and actively intervene to eliminate the lowest-quality programs. Knowing the scrutiny they face from students and policy makers, programs in this environment would strive to offer a good product.

While the implementation of these policies would be challenging in any setting, it is even more so in the current one, as the COVID-19 pandemic has had a profound effect on higher education in LAC (box 5.2). Nonetheless, their