IMPROVING FOR-PROFIT COLLEGES: REALIGNING MARKET INCENTIVES TO MAXIMIZE SOCIAL WELFARE

Abstract

This paper addresses the ability of for-profit postsecondary programs to meet the current and future needs of our country’s educational system and labor market. Because a school’s financial success is detached from student outcomes, for-profits are often poor investments for students and do not maximize total welfare. The higher education market is not capable of forcing the poor performing schools to exit the market and can even incentivize low-performance. To correct market failures, regulatory bodies try to punish unproductive firm behavior and help students make informed decisions about college choice. However, this paper argues that an effective for-profit school system requires an accountability framework that compensates a school based on its ability to provide value to students.