Managerial Efficiency in Nonprofit Private Higher Education

Traditional market indicators (profits, stock prices, etc.) are absent in the nonprofit sector, and, given the shortcomings of variance analysis in analyzing nonprofit budgets, the potential for conflicts between the principal (providers of funds) and the agent (management) abound. Resource-providers to nonprofit entities need a framework in which to evaluate management performance in terms of the efficient use of resources. Based on data obtained from a sample of 33 Tennessee county jails, Hayes and Millar (1990) used a translog budget model to test the responsiveness of cost shares to changes in relative input prices and operating characteristics. Their study presented empirical results that implied managerial responsiveness to such changes. Out study extends that of Hayes and Millar by using a translog budget model to investigate management response to changes in relative input prices and operating characteristics in a nonprofit higher education setting. A system of translog cost and cost share equations is used to analyze data obtained from a national sample of 349 liberal arts colleges. Results of this study are generally consistent with those in the Hayes-Millar study. The translog model is an appropriate approximation of the cost function, and cost shares vary significantly with variations in input prices and operating characteristics of private nonprofit colleges. The results imply that managers do vary their input mix in response to changes in relative input prices and to changes in the operating characteristics. College managements appear to be concerned with efficiency both allocatively and technically.