The context of this thesis explores efficiency measures in higher education (HE) in England. Measures of efficiency serve as a crucial link between the economic sustainability of the HE sector and the policymaking establishment. Given that the idea of efficient allocation of resources, in a period of tighter budget constraints, curtailed government funding and increasing competition for a greater share for research funding and number of students has such a powerful influence, the concept of efficiency becomes meaningful serving as a basis for decisions to improve resource allocation. Understanding the nature of efficiency aims to put in place a simpler and more efficient HE and research system in England that encourages competition and choice, enhances quality, and ensures greater accountability and value for money.
The thesis unfolds two main disciplines of technical and cost efficiency in HE in England. Therefore the research objectives discussed are driven upon that conceptualization of efficiency and provide further insights into first, the effects of merger activity on efficiency, and second on whether permanent or transient (in) efficiency dominates the English HE sector. Those topics are key aspects and critically important for both policy change and ongoing institutional and structural reform and as thus are explored in the lines of this thesis.
Regarding the first research objective on the potential effect of mergers on Higher Education Institutions’ (HEIs) efficiency, in a first stage analysis efficiency scores of English universities are derived for a 17-year period using the frontier estimation method data envelopment analysis (DEA). A second stage analysis explores the effect of merger and other factors on efficiency. We find that mean efficiency for the sector has varied around 60 percent to 70 percent, but that the efficiency levels of the vast majority of individual HEIs are not significantly different from each other. Merged HEIs have efficiency which is 5 percentage points higher post-merger than non-merging HEIs holding all else constant; moreover the efficiency impact of merger comes within 2 years of the merger taking place. Of the other factors included in the second stage analysis, pre-1992 universities have lower efficiency than other types of institution. In addition, having a higher proportion of income from government sources is an incentive to greater efficiency. Finally, a sensitivity analysis was conducted which exposed the post-merger efficiency results to a different method assessment as a validation test of the proposed policy implications. The sensitivity analysis resulted in confirming the main findings of efficiency improvements in the units received the treatment of merger.
Turning to the second research objective, a common weakness in most of the models dealing with efficiency is their deficiency to account for unobserved heterogeneity that finally lead to biased efficiency estimates. Most of the cost efficiency frontier models, focused either on the transient or on the persistent part of cost inefficiency, confounding firm effects (that are not part of inefficiency) with persistent inefficiency or blending persistent inefficiency with latent heterogeneity. However a decomposition of the two parts, persistent (long –term) and transient/residual (short-term) inefficiencies, provides an in-depth analysis of whether short term practises or more long term structural changes within colleges and universities affect the degree of cost efficiency in the English HE sector.
This distinction seems to be further appealing to the policy makers as a regulatory asset that aims at improving the efficiency of the sector through incentive reforms. Hence, more recent developments in panel data allow a further appealing distinction in the cost efficiency of HEIs in which unobserved firm effects (firm heterogeneity) can be disentangled from time invariant and time varying inefficiency. Hence the purpose of this thesis is partly to assess the level of persistent and transient inefficiency in the English HE sector from 2008/09 to 2013/14 by using a four-way error component model (persistent and transient inefficiency, random firm effects and noise) and so as to retain the apparatus of statistical inference stemming from a generalised true random effects (GTRE) model based on maximum simulated likelihood (MSL) techniques.
In order to provide evidence that the aforementioned method ameliorates the predicted power of the model we offer a comparative study through the fundamental models applied in the literature so far. Consequently, statistical inference will be attempted by countering the efficiency estimates of a GRTE model with a random effects (RE) model proposed by Pitt and Lee (1981), informative on the persistent part, and a true random effects model (TRE) proposed by Greene (2005a, 2005b), enlightening the transient part. Finally, omitted variables bias will be controlled by implementing a MGTRE model, minimizing the resulting heterogeneity bias.
The comparison reinforces the validity of the GTRE model since it captures every single component of inefficacy while heterogeneity is controlled. For the English HE inefficiency is considered as persistent since short-run efficiency estimates are proven to be higher than the long-run. This gives further rise for more comprehensive and structural changes rather than simple mechanisms for short-term cost savings.
