Top Schools Unchanged

From Weekly I/O#70

Why do the top 10 companies change every decade, but the top 10 schools remain unchanged?

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The top American universities by most rankings have remained largely unchanged since 1920, while the list of top companies by market cap experiences significant turnover every decade. What makes the difference?

The reasons for this difference are obviously complex and not one dimension. First, there's a lack of experimentation at the institutional level for universities. For example, procedures for tenure in the top 50 research universities are almost the same.

Second, the entry costs of forming a new university are very high, and it's not just because there's a formal toll you have to pay or specific legal restrictions that prohibit you from doing so. Just as a practical matter: sociologically, institutionally, accreditation dynamics, established reputations, and long histories of the existing university that's hard to replicate.

Third, schools have a more stable customer base, as students typically attend for several years, while companies must constantly adapt to changing market conditions and consumer preferences.

And finally, there's no good measurement for improvements in productivity in education, despite the internet's emergence. Combined with the branding effects of other established universities and the long commitment of the students and faculty, the lack of suitable measurement makes it even more difficult for a new school to defeat the incumbent.

The last point is also related to the Baumol effect covered in #20, which explains why prices of labor-intensive services (higher education) keep rising regardless of low productivity growth, as shown in the chart below.

70 Cost Disease

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