The Sensitivity of Capital Use to Price
in Higher Education
and JOHN J. SIEGFRIED
Department of Economics, Vanderbilt University, Nashville, TN 37235-1819, USA
Abstract. We test whether U.S. colleges and universities adjust their physical capital intensity
to diﬀerences in factor prices by regressing the square feet of space per student on construction
prices across institutions. The results indicate that physical space at selective liberal arts colleges
and private comprehensive universities is unresponsive to relative factor prices but do reﬂect
diﬀerences in institutional wealth. At public comprehensive universities and two-year colleges
the evidence suggests that students enjoy more space per student where building costs are lower.
Keywords: Capital, education, higher education, productivity, students per square foot
College and university faculty-to-student ratios are important. They are used
by prospective students as an indicator of the attention they might receive from
faculty if they were to enroll. University budget oﬃcers use them as a bench-
mark for unit costs, often so myopically that one would think faculty salaries
are the only cost of higher education. Economists study them as an inﬂuence on
productivity in higher education. In earlier work on the costs of higher edu-
cation, the present authors found that there is a positive relationship between
the faculty-to-student ratio and cost per student (Clotfelter et al., 1991).
In practice, the share of labor costs in higher education is only marginally
higher than it is in the economy more generally (about 80% of value added
compared to labor’s 70% share in the overall economy). But while the private
for-proﬁt sector devotes considerable eﬀort to ﬁne-tuning the appropriate
amount of capital for its production processes, decision-makers involved in
the production of higher education often act as if their product is produced in
an open ﬁeld, with no capital required whatsoever.
There are a number of reasons capital costs are frequently neglected in
educational production decisions. For one, historic U.S. fund-accounting
standards for not-for-proﬁt educational institutions do not require the
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Review of Industrial Organization 24: 379–391, 2004.
Ó 2004 Kluwer Academic Publishers. Printed in the Netherlands.