Cost Structure, Efficiency and Heterogeneity in US Higher Education: An Empirical Analysis

We estimate a variety of models to evaluate costs in US higher education institutions. A novel feature of our approach involves the estimation of latent class and random parameter stochastic frontier models of the multiproduct cost function. This allows us fully to accommodate both the heterogeneity of institutions and the presence of technical inefficiencies. Our findings suggest that global economies could be achieved by effecting a reduction in the number of institutions providing undergraduate instruction, while increasing the number of institutions engaged in postgraduate activity.