A conspicuous production theory of resource allocation in higher education

Despite well-founded predictions that the 1970's and 80's would be characterized by excess capacity in graduate education, new graduate programs have continued to appear and existing programs have expanded capacity. This paper proposes a utility maximization theory to explain the continuation of the growth process and describes the nature of the public policy which will be necessary to effect changes in resource allocation in higher education. The basic hypothesis of the theory presented in this paper is that utility maximization of decision makers in higher education is functionally related to minimization of the gap between desired and prevailing institutional status. In an operational sense, status depends on an institution's factor complement, i.e., the institution's instructional and research programs and the quality of faculty and other inputs used to operate these programs. This implies that factor complements provide utility to decision makers in addition to their actual contribution to the educational process. Recognition of this factor and the oligopolistically interdependent nature of the decision making process in higher education is essential for the formulation of effective public policy to induce necessary reallocation of resources to graduate programs.