Neighbor-Effects and Economies of Scale and Scope at Public Community Colleges

Abstract

We investigate operating costs at 682 public community colleges in the United States over a 15-year period (2004–2018). The results reveal that costs are spatially correlated across neighboring institutions, indicating the need for a spatial analysis. An institution’s actions are associated with changes in costs for that particular institution (direct-effects), but neighboring institutions’ actions also impact that institution (indirect/neighbor-effect) via labor market channels and local market conditions. The current research found that the neighbor-effects are economically significant at 9%. The spatial analysis further reveals a quadratic relationship between costs and the “production” of associate degrees and certificates granted, as well as a positive relationship between costs and human resources, some specific student demographics and institution characteristics. Overall, the community college sector exhibits economies of scale with respect to associate degrees, but with great variation in how many more degrees these institutions can award before becoming cost inefficient or before impacting access to enrollees with other educational goals. This sector faces diseconomies of scale in relation to certificates granted and Ray diseconomies of scale overall. This suggests room for restructuring and resizing. Community colleges are achieving economies of scope by offering both types of degrees. Moving forward, policymakers and campus leaders should account for unexpected shocks in operating costs due to neighbor-effects when developing policies, planning and budgeting. Funding should be done with the understanding that community colleges do not have full ex-ante knowledge of their costs or their neighbor’s future actions, nor perfect forecasting abilities, no matter how well managed they.