An Incentive Compatible Model for Higher Education deregulation

On Friday I made a submission to the Senate Inquiry into “The principles of the Higher Education and Research Reform Bill 2014, and related matters”.  The submission was accepted and now available for public release (attached).

In summary: “The purpose of this submission is to suggest a model which combines the social equity benefits of Income-contingent Loans with a market design that is ‘incentive compatible’ through an appropriate price discovery mechanism.”

The model seeks to ensure ‘incentive compatibility’ between the social objectives of Income-Contingent Loans and market objectives of returns to investments in education being optimised.

The social objectives of the model are:

1) Equity: all members of society are able to participate on an equal footing with all other members of society independent from constraints of wealth.

2) Opportunity: uncertainty about the future should not constrain educational choices.

3) Cost efficiency: mechanisms to achieve equity and opportunity are cost efficient so as not to negate the benefits of reforms.

The market objectives of modal are:

1) There exists a ‘price signal’ that drives incentive compatible behaviour, (i.e. stop rorting)

2) A financial constraint that necessitates trade-offs between price and quality so that choice can be optimised.

3) That transaction costs of any market mechanism be kept to a minimum.

The model is loosely based on Project Financing techniques reduce counter-party risks associated with agent behaviour.  In particular, that risks associated with asymmetric information and uncertainty fall on those agents best able to quantify and remediate these risks – being universities and fund managers.

Academically, it needs more polishing before it can be turned into a paper.

Higher Education and Research Reform Amendment Bill 2014 – Sean Leaver – 20150227