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(Standard) Economics and Public Policy - Investigating Vocational Education and Training as (Experience and) Credence
Goods
Uwe Dulleck (QUT - QuBE and ANU – Crawford School of Public Policy)
CESifo Lecture 2, December 2016
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
Outline
• Why (experience and) credence goods and VET?
• A simple framework • The VET systems in Australia in the light of the
simple framework • Efficiency and Inefficiency on VET markets • Potential Solutions to Inefficiencies of VET
markets
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
What is special about these goods/services?
• (Nelson, JPE 1970, Darbi and Karni, JLE 1973)
• “Standard” goods … have well known (standardized) characteristics/quality, ideally you know where to get them and no transaction costs are involved (petrol, bricks, milk (?), spring water).
• Search goods … have characteristics that can be observed before buying the good, but one has to “see” the good (clothes).
• Experience goods … have unknown characteristics, but after buying/using the good one finds out about characteristics (wine, electric appliances, tools).
None of the above require (really) an expert to inform clients (stake holders). (Buyers know their type – all strictly prefer high quality over low quality.)
• Credence goods …a buyer neither before nor after purchase knows exactly what he/she needs. An expert seller does know it. (Buyers do not know their type.)
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
Another view on Credence Goods • Unobservable quality (dolphin friendly tuna) • Problem: How can we ensure honest certification or? What
are incentives for experts who are able to “observe” quality at a cost.
• Third party certification: Loss of reputation (grim-trigger equilibrium) (McCluskey and Loureiro, JAgrResEcon 2005), or Activists (Feddersen and Gilligan, JEMS 2001) or government regulation (Baksi and Bosi, EnvResEc 2007)
• Labelling via a retail channel: Leveraging on the reputation of the retailer, i.e. the retailer has an incentive to check on the truth of promised characteristics. (Chu and Chu, Marketing Sc 1994)
See Credence Attributes: Making honesty the best policy, Publication by the Department of Justice, Victoria, 2010.
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
VET as Experience Goods
• In line with the alternative view on Credence Goods, VET can be seen as a special case of an experience good.
• Students cannot judge the quality of a course before enrolling (maybe even not afterwards – in particular when they find a job).
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
Solutions
• Problems to address – Quality of service provision – Communication of program quality – Potential use of irrelevant incentives (?)
• Implications for welfare
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
A simple framework
Students • Vary in their (marginal) willingness to pay (the benefit
they derive for a high quality education/course): vi = vi
h – vil.
• It is efficient for a student to get a low education at cost: (for all i vi
l>cl). • Frequency of students with high wtp: h.
• Students cannot observe before enrollment the quality of a program.
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
The Model (Continued) VET providers
• Have costs to provide courses (Cj and cj, ch ≥ cl). • Receive subsidies (Sj and sj) • Choose the quality of the program and set a price p. • Communicate the quality of the program to the
student (cheap talk)
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
The Model (Continued)
The Experience Goods problem • Students receives value vi
k, with vhigh>ch-cl>vlow. • It is efficient to have both types of VET providers, but
there exists an incentive to overstate quality of a program.
Course quality Student wtp
High Low
High vh –ch>vl –cl>0 efficient outcome
vl –cl>0 too low quality
Low vh –ch<0<vl –cl too high quality
vl –cl>0 efficient outcome
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
Game Tree
Provider chooses price Nature: chooses wtp of student student accepts or rejects provider chooses course quality
p
vh vl
h (1-h)
a r a r
high low high low
(p+s-ch,vh-p) (p+s-cl,v0-p) (p+s-ch,vl-p) (p+s-cl,v0-p)
(0,0) (0,0)
Undertraining Overtraining
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
Solutions
• Problems to address – Quality of service provision – Communication of program quality – Potential use of irrelevant incentives (?)
• Implications for welfare
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
Solutions
• Regulation (quality assurance) • Reputation / Repeated purchases • Warranties
• Discuss costs and possible implementation
– MyVET – feedback platforms – Conditional payments of fees
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
Expert Services (in this seminar)
• Sawbones, Cowboys and Cheats
• Doctors, Mechanics, Computer Specialists (D&K 2006)
• People/Sellers/Providers that know more about your needs than yourself.
• Darby and Karni (1973) – Credence Goods, buyers are not able to find out which quality they need (not even after a – successful - treatment).
• Problems: Inefficient (Over- & Under treatment), Overcharging
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
A simple framework
Students • are ex ante identical (the probability to have a certain
ability and derive the same benefit if successful with the education)
• Want to study
• do not know their ability, they only know: - they are of high ability (are able to get a high
qualification) with probability q - they are of low ability with prob. 1-q
• they are matched with one seller who provides treatments
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
The Model (Continued) VET providers
• Have costs to provide courses (Cj and cj, ch ≥ cl). • Receive subsidies (Sj and sj) • set fees/prices ph and pl for the two (n) programs
treatment (with ph ≥ pl) • can observe the ability of a student
• decides whether to recommend h or l course/program to the student.
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
The Model (Continued)
The Credence Goods problem • receives value vj if they can graduate successfully
(their ability ai is greater than the difficulty dj)
Course difficulty Student ability
dl dh
al vl-pl efficient outcome
0-ph overtraining
ah vl-pl undertraining
vh-ph efficient outcome
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
Timing of Decisions
1. VET provider posts price
3. VET provider observes the student’s ability and recommends a course
2. Student decides to engage with the sector
4. Student chooses whether to enroll
5. Student succeeds or fails based on ability and
difficulty of the course
Government sets subsidies
VET Provider decides to enter market
Focus of the analysis
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
VET as Credence Goods – Game Tree VET provider posts prices
Student enters market or not
Nature determines student ability
VET Provider recommends
Seller
charges
in out
ph, pl
h h l l
ph ph pl pl
q 1-q
Overtraining student benefit from education is 0
We assume Verifiability, thus Overcharging is ruled out
ai=h ai=l
Undertraining student benefit from education is lower than his/her potential
Efficient outcome Efficient outcome
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
The frame work and VET policies in different states
Table 3.1 Variable in Model State Comment
𝑆𝑆𝑗𝑗
ACT, TAS, NSW, NT QLD, VIC
TAFE contribution
Public VET providers receive some sort of unconditional financial: ACT, TAS, NSW, NT - non-contestable
appropriation QLD - annual grant to cover assets costs VIC – committed special funding for a period
to assist TAFEs with the transition to the new funding regime of over $370 million.
𝑠𝑠𝑗𝑗
ACT, VIC
QLD
TAS, NSW
NT1 SA, WA
One rate for state and public providers
All fully subsidised
Different rate for private and public providers
Per student prices or subsidies paid to VET providers, usually in subsidy bands or levels: ACT – three different bands A > B > C
VIC – five different bands A > B > C > D > E QLD – four different levels TAS, NSW – Variable rates All NT Training Entitlement are fully subsidised
(100%) SA, WA – Public provider are paid a higher
rate than private providers
Notes: 1 Subsidies under the NTs pilot program are different for public and private providers. 2 In NTs pilot program, private VET providers are allowed to charge student a fee. These fees are not capped but typically low in the range of $100 to $300. Information taken from Bowman, K & McKenna, S (2016).
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
The frame work and VET policies in different states (continued)
Variable in Model State Comment
𝑝𝑝𝑗𝑗
WA, TAS, NT2
NSW
SA, VIC, QLD
Fees students have to pay
Fees that can be charged to a student: WA, TAS, NT – Tuition fixed, Discretionary
variable NSW – Fixed, Fees are capped at $2000 for
commencing students in 2015 SA, VIC, QLD – Variable fees
ACT, SA NSW
Regulated fees and prices
Fee/price regulation by state government: ACT – Semi-deregulated, meaning set within a
published minimum and an unpublished maximum fee
SA – Minister can set maximum fee chargeable for a course or specify courses for which no fee may be charged
NSW – Fixed base price is set for each qualification. Prices range from $1000 - $10000.
Notes: 1 Subsidies under the NTs pilot program are different for public and private providers. 2 In NTs pilot program, private VET providers are allowed to charge student a fee. These fees are not capped but typically low in the range of $100 to $300. Information taken from Bowman, K & McKenna, S (2016).
Table 3.1
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
Efficiency and Inefficiency on VET markets
Result 4.1 If the VET provider is only driven by economic incentives, any student will be recommended to enrol in the course that yields the highest marginal financial contribution for the provider. In particular, the provider will • Recommend the appropriate course if (ph+sh-ch)= (pl+sl-cl); • Recommend undertraining if (ph+sh-ch) < (pl+sl-cl); and • Recommend overtraining if (ph+sh-ch) > (pl+sl-cl). These results follow from Lemmas 1-3 presented in the accompanying technical report.
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
Intuition Figure 4.1: Economic incentives for over- and undertraining on Credence Goods VET markets.
ph
ph= sh-ch
= sl-cl
Under- training
ph-sh-ch= pl+sl-cl
pl
Overtraining
Appropriate recommend -ation
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
Efficiency on VET markets
Result 4.2 If VET providers are free to set their student fees and a large enough number of students make rational choices about their interaction with VET providers, they will always choose fees that provide them with an incentive to recommend the appropriate course to a student.
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
Intuition Figure 4.2: Student benefits from different (prices) offered by VET provider
pl+sl-cl
ph+sh-ch
Student’s benefit
q(vh-ph) +(1-q)(vl-pl)
q(vh-ph)
(vl-pl)
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
Over- and Undertraining on VET markets
Result 4.3 Explicit and implicit regulations or constraints on the price setting by VET providers, including non-negative fees or a monotonic fee structure for different courses can lead to economic incentives for VET providers to over- or undertrain students.
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
Solutions – Getting subsidies right
• The technical report looks at subsidies that maximize expected welfare for students.
• If the distribution of abilities is balanced (not too different frequencies) sl=sh is welfare maximizing.
• In general, the difference in subsidies cannot be higher than differences in costs to offer the course.
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
Solutions - Liability
• Dulleck and Kerschbamer (2006) and Dulleck, Kerschbamer and Sutter (2011) show that liability can increase efficiency on Credence Goods markets.
• Reputation can serve this functions. Information about VET providers should summarize labor market outcomes (not – only - student evaluations).
• Payment of VET providers conditional on job market outcomes (income contingent fee payments) -> risk of providing undertraining incentives.
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
Solutions – Regulating capacities
• Emons (1997, 2001) shows that limited capacities if they mirror the distribution of abilities can help to overcome credence goods problems.
• Important, capacities cannot be set given industry need but need to match student ability distribution.
• If this is the case VET providers have no incentive to send students to the “wrong” program as enough students for this program will apply.
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
Solutions – Independent Brokers
• Dulleck, Gong and Li (2015) discuss the role of independent advise on Credence Goods markets.
• Brokers need to be separated in their income from course enrolment decisions of students.
• Consider the reason why VET providers are good advisors for students. Do brokers have the same skill/experience? (D&K 2006, commitment)
VET as (Experience and) Credence Goods Uwe Dulleck, CESifo 2 2016
Conclusions 1. A too tightly regulated VET market can lead to inefficiencies. 2. If VET providers are completely free to set prices themselves,,
competition will ensure that they choose prices that incentivize them to recommend the appropriate program students.
3. Inefficiencies on (price-deregulated) credence goods markets may follow from other explicit or implicit restrictions on providers. If prices have to be non-negative (no net-gifts to students) and/or have to be monotonic (high qualifications need to carry high fees than lower qualification) then inefficiencies may result from misaligned government subsidies.
4. In case constraints lead to inefficiencies on credence goods markets, we discussed three potential solutions: introducing liability, capacity regulation and independent broker.