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What Universities Need: More Skin in the Game

In the last couple of years, there are more cries for universities to have more “skin in the game,” that is to say greater incentives to show improved performance. The distinguished banker and financial scholar Alex Pollock, now of the R Street Institute, has written frequently about this: he should have “Let’s have skin in the game” inscribed on his tombstone when he passes on.

The context in which “skin in the game” is most discussed is with regards to student loans. When students default on their loans, it imposes a cost on U.S. taxpayers. Many schools accept a large number of applicants that they know are extremely risky and unlikely to graduate. At some schools the six-year graduation rate is under one-third: there are at least two dropouts for every successful recipient of a bachelor’s degree. The admission and retention policy decisions of these schools ultimately impose a significant burden on taxpayers, as many of these dropouts simply do not repay their loans.

“Skin in the game” can work in various ways. Perhaps colleges could be made liable to repay at least part of the defaulted loan, maybe beyond a certain baseline expected default rate that arises from unanticipated adverse circumstances such as an accident or illness impeding an ability to work. A rule like this would impact most severely on schools with mediocre academic reputations, few endowment resources, and a high proportion of low-income, first-generation, and minority students.

Richard K. Vedder is a Senior Fellow at the Independent Institute, Distinguished Emeritus Professor of Economics at Ohio University, and co-author (with Lowell Gallaway) of the award-winning Independent Institute book, Out of Work: Unemployment and Government in Twentieth-Century America.

From Richard K. Vedder
CAN TEACHERS OWN THEIR OWN SCHOOLS?: New Strategies for Educational Excellence
In Can Teachers Own Their Own Schools?, Richard Vedder examines the economics, history, and politics of education and argues that public schools should be privatized. Privatized public schools would benefit from competition, market discipline, and the incentives essential to produce cost-effective, educational quality, and attract the additional funding and expertise needed to revolutionize school systems.

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