Research Proposal to the Alfred P. Sloan Foundation, New York, New Yor
Incorporating Intangible Planning Variables In Simulation Models of Colleges and Universities
Dr. Andreas Ortmann
Assistant Professor
Department of Economics
Bowdoin College
Brunswick, ME 04011
207-725-3592 voice
207-725-3691 fax
February 23, 1998
Summary
The Jackson Hole Higher Education Group's CyberCampus game development project and prototype is a much needed
and intriguing first attempt to model the internal dynamics and strategic interaction of institutions of higher learning.
However, notwithstanding the fact that its database will be tied to real institutions representative of seven basic "market
segments", CyberCampus is, for now, very much a game. Two steps need to be taken to move it closer to being a
veritable simulation of higher education. First, is to understand to what extent CyberCampus version 1.0 and its database
(which draws on tangible planning variables) are indeed a working small-scale abstraction of the current higher education
landscape in the U.S. Second, is to understand how, and if, intangible planning variables (for which simulations of for-profit
firms and industries do not provide ready-made templates), can be conceptualized and incorporated in such a simulation.
While CyberCampus will be an important reference point, I propose to explore conceptual and empirical issues that are likely
to be relevant for all simulations of the internal dynamics and strategic interaction of colleges and universities.
Why this research proposal?
The Jackson Hole Higher Education Group's CyberCampus game development project ("CyberCampus") provides us
with a first model of the internal dynamics of institutions of higher learning and their strategic interactions. As such it opens
fascinating avenues toward a highly effective simulation model of higher education in the U.S. However, notwithstanding
the fact that its database is tied to real institutions representative of seven basic "market segments", CyberCampus is very
much a game. Now that a CyberCampus beta version will be available before long, two steps need to be taken to move it
closer to being a simulation of higher education in the U.S., i.e., an environment that university leaders can use to sharpen
their managerial and strategic skills. The first step is to understand to what extent CyberCampus version 1.0 and its database
(which draws on tangible planning variables) are indeed a working small-scale abstraction of U.S. higher education.
The second step is to understand how, and if, intangible planning variables such as student satisfaction, faculty morale,
educational value, and reputation can be conceptualized and incorporated in simulations of colleges and universities.
This is no trivial problem. Institutions of higher education (which for the most part are non-profits) are often conceptualized
as institutions sui generis whose objective functions are multi-dimensional and fuzzy. An important challenge is thus to
conceptualize and parameterize their objective functions and to understand to what extent the idiosyncratic nature of the
higher education enterprise affects the decision-making of the relevant players. It is the purpose of the proposed research
to explore these issues and to provide conceptual clarifications and suggestions for appropriate parameterizations regarding
the specific issues discussed in the following.
The proposed research is therefore both empirical and conceptual. Both empirical and conceptual work will be informed by
the extant CyberCampus game design but it will not be restricted to it.
Skills and experience that I offer:
My areas of specialization are industrial organization (with particular emphasis on higher education issues), game theory,
and experimental economics. Without being aware of the CyberCampus project, I have written over the past few years
several articles and working papers that are closely related. My work on institutions of higher education has focused on
three aspects:
First, an attempt to answer the puzzling question of why institutions of higher education in the U.S. are currently almost
exclusively nonprofits. It has been suggested that colleges and universities are organizations sui generis that overcome
the problem of trustworthiness that for-profit firms are allegedly afflicted with (e.g., Hansmann 1980, 1994) and/or the
publicness and multidimensionality of their goals (e.g., Massy 1981). I have proposed that the current state of affairs is
driven by indirect subsidies that nonprofits receive through numerous tax and other exemptions (Ortmann & Paalandi).
The recent dramatic increase in for-profit higher education in this country (for example, Strosnider 1998 or Hammonds &
Jackson 1997) and the well-documented existence of for-profits in other countries (Geiger 1986, 1987) seems to lend
credence to this conclusion which I base for the most part on attempts to theoretically understand the issues (Ortmann &
Squire; Benner & Ortmann; Ortmann & Palaandi; Ortmann 1996, forthcoming; but see also Vail & Ortmann and Ortmann
1997).
Second, attempts to understand and conceptualize the repercussions of incentive alignment issues, and their consequences
for uneven faculty workload, faculty and student morale, and organizational culture (Ortmann & Squire; Ortmann 1996,
forthcoming; see also Kreps 1990). In Ortmann & Squire, for example, I have employed rudimentary game theory to
model colleges and universities as cascades of principal-agent games. By explicitly defining the objective function of a
college and enumerating the aligned and unaligned goals for four classes of players -- alumni/students, overseers,
administrators, tenured and untenured professors -- I demonstrate that organizational outcomes such as administrative
lattice and academic ratchet can be conceptualized as the result of the incentives that the major constituencies of educational
institutions face. In our analysis, the often perceived multi-dimensionality of educational institutions' value functions emerges
as the result of incentive alignment problems and not as a characteristic per se of such institutions.
Third, attempts to understand advances of modern information technologies and to conceptualize a virtual liberal arts college
(Benner & Ortmann), i.e., a college that no longer exists in any significant physical form. I should mention that I have done a couple
of detailled studies of Bowdoin College. (See, for example, Vail & Ortmann.)
I should also mention that in my teaching at Bowdoin, I have used simulations like "Entrepreneur" and, lately, "Airline." This has
given me both an appreciation of - the interest simulations generate -- many students make comments like "The best thing I have
done at Bowdoin!" -- and - the problems that possibly affict simulations.
Specific research questions which I intend to pursue:
I understand CyberCampus to be ultimately both a simulation and an attempt to clarify for the interested public the internal dynamics
of higher education institutions and their strategic interaction (note 1). I also understand that the authors hope that CyberCampus will pave the
way for other simulations of colleges and universities. While the questions in the following are partially framed as a critique,
and proposals for refinement, of the CyberCampus game project, they address issues of simulations of higher education in
general (note 2).
Specifically, I propose to study the following five research questions:
Research question One:
Is a college like a firm?
Gordon Winston, drawing on Hansmann's work, has identified six characteristics of higher education institutions that he claims show
why a college can't be more like a firm (Winston 1997). He also claims that economic theory breaks down as an
explanatory tool. I have recently finished the draft of a paper that contradicts this claim and explains why there is nothing
about higher education that cannot be handled by standard micro-economic theory (Ortmann & Paalandi). In related work
I have also proposed that educational institutions per se have, at least theoretically, one-dimensional value functions and
that the often observed multi-dimensionality of their value functions is the result of incentive alignment problems (Ortmann &
Squire, 1996; Benner & Ortmann, 1997; see, e.g., Massy 1981 for a different view).
The further exploration of this issue is of importance for two reasons. First, as mentioned earlier, for-profit firms have made
dramatic inroads in the higher education enterprise. Their growing importance has already changed the way non-profit
university business is conducted. Thinking about core competencies and competitive advantages, optimal allocation of
resources, and performance measures of such seemingly intangible variables as educational and research outcomes has
become de rigeur for most institutions. I have argued elsewhere that these developments parallel the developments in other
service industries and that, in fact, the nature of nonprofit university business is bound to change because of the external
pressures resulting from for-profit competitors, cuts in state funding, increased enrollments, etc. (Ortmann, 1997) To what
extent these external pressures induce internal incentive allignments has not been studied. Second, CyberCampus, as of
now, does not incorporate a market segment for "nontraditional providers" like the for-profit University of Phoenix and
draws its database from a set of firms representative of the seven traditional market segments the authors identified (note 3).
While such a strategy is fine as long as CyberCampus is a game, it is bound to become a problem if CyberCampus is to be
made into a simulation. To the extent that the rapid growth of the for-profit higher education sector ("non-traditional providers"),
and the increasing reliance on long-distance education, dramatically change the nature of the incumbent higher education
enterprise (Strosnider; Hammond & Jackson; Raphael & Tobias; Zemsky, Shaman, & Iannozzi), the repercussions of the
rapid entry of non-traditional providers and their impact on the internal dynamics of colleges and universities need to be
understood.
The work on these questions will be both conceptual and empirical.
Research question Two:
What determines the demand for a college's services?
This question is in part motivated by the intriguing fact that Bowdoin's recent drop in the U.S. News and World Report
rankings seems to have led to a 10 percent decrease in applications. Theoretically, this is not surprising. To the extent
that the ranking of a college is correlated with its graduates' job prospects, a drop in rankings should, according to basic
economic theory, lead to a shift of the demand curve. What is of interest here is that it seems possible, based on data like
those provided by the U.S. News and World Report rankings, to quantify these shifts.
There are two related aspects. First, to what extent has the increasing practice of selective colleges to fill large portions of
their classes with early admissions affected the admissions process? Second, to what extent does a reduction in the quality
of "customer-input technology" (Rothschild & White), e.g., the students that enroll, shift the demand curve? (In Ortmann &
Paalandi, we propose a simple model that addresses the issue.)
The work on these questions will be conceptual and empirical.
Research question Three:
What are the inputs that determine "utilities" of students and institutions?
This question is closely related to the previous one. Students make application and enrollment decisions and institutions make
admission decisions according to their "utilities" (or, preferences). What are the relevant inputs that determine the "utilities"
(preferences) of students and institutions?
In CyberCampus Design Working Paper 2.1. [Simulation Engine: Student Intake Models] relevant "student attributes" and
"institutional attributes" are enumerated. These attributes affect both faculty morale and student morale - concepts that
CyberCampus, and the relevant economics literature have recognized as important issues (e.g., Kreps 1990). I propose to
make operational these concepts that turn out to be rather hard to grasp. There is hope though, as for example the "Airline"
simulation parameterizes a flimsy concept such as "employee satisfaction."
In his comment on the earlier draft of this proposal, Bill Massy suggested that he already worked out statistical procedures
for estimating the student and institutional utilities from the IRHE supplied data but that he didn't have time to implement
them yet. He suggested that a collaboration on this topic might be appropriate. That certainly would be fine with me.
The work on these questions will be both conceptual and empirical.
Research question Four:
Department performance measures:
CyberCampus Working paper 2.2. does a marvellous job in outlining academic operations. However, it is not clear how
exactly such outcome measures as department prestige, student satisfaction, faculty morale, etc. can be operationalized.
It is also not clear what determines educational value, how curricular innovation factors in performance criteria, etc.
I propose to operationalize these concepts. The work on this question would be both empirical and conceptual.
Research question Five:
What would be a reasonable starting parameterization for a simulation of the higher education landscape?
I understand that the Institute for Research on Higher Education (IRHE) of the University of Pennsylvania has assembled
a data package necessary to implement CyberCampus version 1.0. Understanding this database, and evaluating to what
extent it is a reasonable representation of the current and future higher education landscape, will allow me to get a sound
understanding of the working of the beta version of CyberCampus game. It seems an appropriate point of departure and
reference point for the exploration of the potential and limitations of simulations of colleges and universities.
The projected outcome:
I anticipate that three kinds of products will emerge from the research I propose: Conceptual clarifications of issues
delineated by the research questions above, suggestions for parameterizations of the key areas that I propose to study,
and articles that publicize CyberCampus and discuss the potential for (and possibly the limitations of) simulations of the
internal dynamics of institutions of higher learning and their strategic interactions. Journal outlets could be economics
journals such as Rand Journal of Economics and Journal of Economic Behavior and Organization and higher education
journals such as Journal of Higher Education and Change.
References
Benner, Derek and A. Ortmann (1996), The Virtual Liberal Arts College. See attached cv.
Geiger, Roger L. (1986), Private Sectors in Higher Education: Structure, Function and Change in Eight Countries.
Ann Arbor: University of Michigan Press, 1986.
Geiger, Roger L. (1987), Privatization of Higher Education: International Trends and Issues. Princeton: International
Council for Educational Development.
Hammonds, Keith H. and Susan Jackson (1997), The New U. A tough market is reshaping colleges. Business Week
12/22, 1997, 96 - 102.
Hansmann, Henry (1980), The role of nonprofit enterprise. Yale Law Journal 89, 835 - 901.
Hansmann, Henry (1994), Organization of Production in the Human Services. Program on Nonprofit Organizations
(Yale University), Working paper No. 200.
Institute for Research on Higher Education of the University of Pennsylvania (1997), A Proposal to the Alfred P. Sloan
Foundation.
Kreps, David M. (1990), Corporate Culture and Economic Theory. In J. Alt & K. Shepsle, Perspectives on Positive
Political Economy (pp. 90 - 143). Cambridge, UK: Cambridge University Press.
Massy, William F. (1981), A Microeconomic Theory of Colleges and Universities. In D. Hopkins & W. Massy,
Planning Models for Colleges and Universities (pp. 73 - 130). Stanford, CA: Stanford University Press.
Ortmann, A. (1996), Modern Economic Theory and the Study of Nonprofit Organizations: Why the Twain Shall Meet. See cv.
Ortmann, A. (1997), How to Survive in Postindustrial Environments: Adam Smith's Advice for Today's Colleges and
Universities. See cv.
Ortmann, A. (forthcoming), The Nature and Causes of Corporate Negligence, Sham Lectures, and Ecclesiastical Indolence:
Adam Smith on Joint-Stock Companies, Teachers, and Preachers. See cv.
Ortmann, A. and Kaire Paalandi (1998), Why a College is Like a Firm. See cv.
Ortmann, A. and Richard C. Squire (1996), The Internal Organization of Colleges and Universities: A Game-Theoretic
Approach. See cv.
Rothschild, Michael and Lawrence J. White (1995), The Analytics of the Pricing of Higher Education and Other Services
in Which Customers are Inputs. Journal of Political Economy 103 (June), 573 - 86.
Strosnider, Kim (1998), For-Profit Higher Education Sees Booming Enrollments and Revenues. Chronicle of Higher
Education 1/23, A36 - A38.
Vail, David and A. Ortmann (1992), Growing Bowdoin. An Analysis and Forecast of the Budgetary Impact See cv.
Zemsky, Robert, Susan Shannon, & Maria Iannozzi (1997), In Search of Strategic Perspective: A Tool for Mapping the
Market in Postsecondary Education. Change (November/December), 23 - 36.
Winston, Gordon W. (1997), Why Can't a College Be More Like a Firm? Change (September/October), 32 - 38.
Notes:
1
This research proposal is based on my reading of CyberCampus Design Working Paper 2.1. [Simulation Engine: Student
Intake Models], Working Paper 2.1. [Simulation Engine: Modeling Enrollment Management], Working Paper 2.2.
[Simulation Engine: Academic Operations], Technical Document 2.3. [Simulation Engine: Modeling Resources Allocation
and Finance], Technical Document 2.4. [Simulation Engine: Modeling Physical Plant Activities], Technical Document 2.5.
[Simulation Engine: Performance Indicators], and Technical Document 2.6. [Simulation Engine: Component Descriptions].
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2
One of the referees of the earlier draft of this proposal questioned the value added of the proposed level of academic rigor
to the "game" and the fact that I address only a few select model inputs out of hundreds that are possible. I note that this
proposal is not about the game, but about the potential and limitations of simulations of colleges and universities. The research
questions I have formulated address key areas that I believe every simulation worth its money needs to address.
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3
I realize that the authors plan to add an eighth market segment for "nontraditional providers". [See CyberCampus Design
Working Paper 2.1., "Simulation Engine: Student Intake Models."]
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