52 F.G. Mixon Jr, R.W. McKenzie Economics of Education Review 18 1999 51–58
efficiency and the behavior of a firm’s manager executive leadership across an array of ownership
structures. The present paper offers an extension to the literature
in this area. We offer statistical evidence which suggests that managers of firms in the higher education industry
in the United States universities and colleges pursue a variety of goals consistent with economic theory in the
context of firm ownership, and that the tenure of man- agers universitycollege Presidents in this industry dif-
fers according to the firm’s organizational structure. Our results add to and update the body of empirical work in
this field of industrial organization.
2. The hypothesis
Excessive costs
or deviations
from profit
maximization can be induced by government regulation of firms or government ownership of firms within indus-
tries. In transportation, for example, economists have suggested that there is reason to believe that regulations
distort producers’ incentives, leading to deficient cost control “expense-preference” behavior and excessive
investment see Kahn, 1988. The seminal work in this area of industrial economics includes Averch and John-
son 1962; Wellisz 1963, and the excessive investment referred to above is known as the Averch–Johnson
effect.
1
A more recent survey of developments is pro- vided by Sherman 1985. In regulated firms, cost mini-
mization and thus standard, rational profit-maximizing behavior is not the objective; instead, managers maxim-
ize their own utility in more costly ventures. These may include luxurious offices and support staff, limousine
services, and country club memberships, to name just a few. In fact, the economics literature is replete with stud-
ies detailing various alternative firm goals see Machlup, 1967; Jensen and Meckling, 1976; Fama, 1980. These
goals include sales maximization, staffsupport maximiz- ation, growth maximization, and satisficing behavior.
According to DeAlessi 1974a, one of the alleged implications of the utility-maximization hypothesis is
that government decision-makers enjoy longer tenure than their counterparts within privately owned firms.
Individual decision-makers are hypothesized to maxim- ize a utility function whose variables reflect a variety of
goals such as health, security, prestige, and the welfare of others, to name a few see also DeAlessi, 1967. The
utility-maximizing manager has the incentive to increase the size and duration of all job-related pecuniary and
1
The work of Averch–Johnson has been challenged by some economists. Dechert 1984 points out that regulated firms may
fear the possibility that regulatory agencies will expropriate any sunk capital investment through tighter regulatory controls.
non-pecuniary streams of income DeAlessi, 1974a: 646. While managers of privately owned firms might
achieve these ends through attempts to increase the value of marginal product, managers of political enterprises
often pursue increases in the size of the budget to be administered and the size of the support staff with “like-
able” characteristics, and more pleasant working con- ditions Niskanen, 1971, 1975. Allowance of such prac-
tices by the firm’s owners depends upon enforcing contracts and the effectiveness of internal controls see
DeAlessi, 1974a: 646.
The main difference between private and government- owned firms lies in the relatively higher cost for polit-
ical firms of transferring ownership shares, which can be achieved only by moving to another state district,
borough, etc. or by getting involved within the political system seeking office, voting, etc.. Such essentially
non-transferable
property rights reduce behaviors that detect and police managerial efficiency. If differences in
property rights associated with alternative ownership arrangements present the choosers managers with dif-
ferent opportunity sets and, thus, with different cost– reward structures, then the resulting decisions will differ
systematically DeAlessi, 1974b: 2. This implies that managers of political firms have greater opportunity to
increase their own welfare at the expense of the employer’s wealth DeAlessi, 1974a: 646–647. In fact,
as DeAlessi points out, managers of government firms, particularly those endowed with a politically influential
clientele, can survive and even prosper in the presence of persistent deficits and significant economic losses. These
managers have greater opportunities for utility-maximiz- ing behavior.
Salaries pecuniary returns of managers in political firms are often more constrained through statutory
ceilings than those of their private counterparts. Joskow et al. 1996 provide statistical evidence of CEO com-
pensation across 87 state-regulated electric utilities for 1978–1990 which points out the political pressures on
executive pay. For instance, CEO compensation is inversely related to utility rate trends over time and how
“consumer-friendly” the regulatory climate is within which the utility operates. These results imply that the
opportunity cost of nonpecuniary sources of utility is lower. Therefore, the manager will find that the opport-
unity cost of activities designed to enhance the prob- ability of survival in office is also lower, and he will
have greater opportunity to increase the present value of his pecuniary and nonpecuniary sources of income by
increasing his job security. Such managers will have greater incentives and opportunity to reward subordi-
nates for loyalty, to institutionalize decision-making in order to dissipate responsibility for errors, and to insti-
tutionalize tenure DeAlessi, 1974a: 647. These points are substantiated by Joskow et al. 1996, who point out
that the appointment process and tenure rules also are
53 F.G. Mixon Jr, R.W. McKenzie Economics of Education Review 18 1999 51–58
related to CEO compensation in a way consistent with DeAlessi’s analysis. The present paper explores the ten-
ure of managers in the higher education industry in the United States in order to assess the validity of the theor-
etical construct of DeAlessi, Crain and Zardkoohi, and others. While other studies see Toma, 1986, 1990 have
discussed agency problems related to boards of trustees within the operation of higher education, no study to date
has examined the influence of organizational ownership on managerial executive tenure in this industry.
3. The model and data
