For-Profit College Entry and Cost Efficiency: Stochastic Frontier Estimates vs Two-Year Public and Non-Profit Colleges

This paper provides stochastic frontier cost and (in)efficiency estimates for private for-profit colleges with comparisons to public and private non-private colleges. The focus is on the two-year U.S. higher education sector where there exists the largest and fastest growing entry of for-profit colleges. Unbalanced panel data is employed for four academic years, 2005-2009. Translog cost frontiers are estimated with an inefficiency component that depends upon environmental factors defined by college specific characteristics. More experienced public and private non-profit colleges are found to be more cost efficient relative to the newer entrants. In addition, the newer for-profits exhibit greater efficiency variability but also show some evidence of efficiency gains over the academic years. There is some cursory evidence that for-profit entry is positively correlated, albeit weakly, with greater public college sector inefficiency.