Some Economics of Rankings-BECKER

Rankings of educational programs, hospitals, physicians, cars, and other goods and services have become increasingly popular during the past 20 years. There is a robust market for various rankings because of the difficulty students, patients, and other consumers have in getting sufficient information about the numerous attributes being offered, such as quality of other students and faculty, size of classes, earnings of graduates, or mortality rates of hospital patients. I believe that on the whole rankings convey useful information about quality, although there are obvious problems in getting reliable rankings. Perhaps the most serious problem with rankings is that institutions "game the measure". So if the ratio of admissions to acceptances were used, then as Posner indicates, schools might tend to admit applicants who do not have good alternatives. If hospitals are ranked partly by the death rate among patients, then hospitals have an incentive to shy away from admitting terminally ill patients, or those with difficult-to cure conditions. Yet schools and other organizations respond to their ranking position not only by gaming the measure, but also by improving what they provide. In this way, some business schools and colleges ranked low in the amenities and other characteristics of the learning experience provided students have responded by improving physical facilities and the guidance offered to students, reducing class size, and increasing networking. The issue in determining whether measures have on balance positive or negative value to consumers is whether the good information provided exceeds the misleading information, due in part to "gaming". The difficulty for consumers is that not only do colleges, business schools, and hospitals provide credence products, but also that there is little or no repeat business since students do not go to the same college more than once, and few patients have multiple spells in the same hospital. Still, applicants to colleges (and/or their parents), and sick persons choosing hospitals tend to recognize that institutions have an incentive to game the measure. That weakens the quantity of information they believe they get from rankings based on particular measures, but it does not generally make the information worthless. Any conclusion that rankings make the information available to consumers worse does not do justice either to the difficulty of making sensible decisions about education programs and medical help in the absence of ranking information, nor to the competitive search for different criteria to use in rankings of schools and medical care. A more accurate conclusion would be that the great interest in rankings, and the rapid expansion in the number of magazines, newspapers, and non-profit groups that provide rankings of schools, hospitals, doctors, and other goods and services suggests strongly that consumers believe they do get useful information from rankings. How much information they get varies with their access to other information. Those profit and non-profit organizations that provide rankings compete by emphasizing different criteria. For example, the several newspapers and magazines that rank MBA programs weight differently evaluations of business recruiters, earnings of graduates, the increase in earnings of graduates compared to what they earned before enrolling, the amenities provided, the research of faculty, the attention to globalization issues, and so on. That rankers compete by using different criteria and weightings strongly suggests that significant numbers of applicants to schools consider how rankings are determined. To be sure, there are ways to improve the basis of rankings that make them less vulnerable to gaming by the institutions being ranked (see the discussion of hospital rankings in Mark McClellan and Douglas Staiger, "Comparing the Quality of Health Care Providers", and other papers by these authors). For example, MBA programs can be compared not by earnings of graduates, but by the increase in earnings of graduates compared to what they earned before entering an MBA program. This shift in the earnings measure would help control for the quality of students in a program (the Financial Times' rankings of MBA programs are based partly on this measure of value added). To help determine what benefits students actually get from an MBA program or college, one should not only interview current students, but also those who graduated 3, 5, or 10 years ago. After several years of working or additional study, the effects of attempts to influence student evaluations through superficial amenities should have been replaced by a consideration of longer-term benefits. The obvious interest in rankings by consumers suggests that they consider the rankings of schools and programs, or health care, or automobiles to be valuable. These rankings can be, and are being improved, but that they have survived the test of the marketplace indicates that consumers believe they are useful enough to be willing to pay for them.

Comments

[William Rhoads]

Perhaps the greater interest on the part of consumers in ratings is related to the greater interest of economics in the effects of asymmetric information on markets, and in particular on behavioral economics and the demonstration by Kahneman and Tversky that how information is "framed" influences what decisions are made. Economics used to teach that advertising existed to provide useful information. Now we know that it tries to "frame" information so that we will not make rational choices. As writers and teachers, I am sure you would like to believe that after a generation of teaching a new view of information in economics, it is influencing consumer behavior as we try to protect ourselves as best we can from our lack of information compared with sellers in markets.

The big problems with ratings is that they are based on the past, when what we want to know is what will happen in the next few years. A useful supplement to ratings would be news on recent changes at each elite educational institution or faculty that probably will affect the quality of education in the next few years--loss or gain of key faculty, turmoil or good governance, etc.

[n.e.hat]

In my opinion, the real question should be, "Why the development of this ranking system in first place?" Have we become so conditioned by the mass-media via the marketers and advertisers that we now view education as nothing more than any other consumable product? With the same kind of "branding" that goes on with any other product. Consumer Reports has got cars, perhaps USN&W has developed a niche product much like CR. Hey! I need USN&W's rankings to see what college or university I should buy! You know, gotta keep up with that Jones's kid down the street and do them one better.

Whatever? ;)

[Ben Alper]

I find trends in the rankings to be useful. When choosing a law school I looked at past rankings to see which schools were consistently moving up while others were trending down. I ended up selecting lower ranked school because it was trending upwards over a higher ranked school on a downward slope. I expect my school to surpass the other one in the next few years. As a student all I want (besides a good education) is the rank to rise in the future because it makes my degree worth more. Since schools with large amounts of money have the most potential to improve their rankings, students might choose a school strictly on the size of its endowment. I would also be interested in seeing how much weight employers give to law school rankings. I assume its a great deal although they are better able to judge schools on their own by looking at the performance of recent graduates that they've hired.

[Oleg Zubarev]

Using salary differencial is an interesting measure of the quality of the MBA program. However, given that average salary after top MBA schools is practially the same, controlling for the industry and location of employer, how much this information alone tells about future earnings of the applicant? Obviously, multiplying his own pre-MBA salary by this ratio will not be a good predictor of his future earning. Also, this measure might provide incentive to admit students with low wages, especially from emerging economies, where wage differential with post-MBA salary in the US might be huge.

[Ben]

Re: Ben Alper
I do not think that USNews Law School rankings vary all that much, with only a couple of prominent exceptions like George Mason and San Diego. I have read, though not verified for myself, that the top 14 schools have been the same since the early 90s and the top 16 the same since 1999. There is obviously movement inside this bracket, but nothing major.

Also,
MBAs would be one of the few degrees where before and after calculations would have any value at all. Most college and graduate programs serve as gatekeepers to certain kinds of jobs, which would seem to make before/after comparisons pretty useless. If I was a really good student in high school, but made minimum wage because I worked a high school student appropriate part-time job, then the before and after approach won't do much to account for my innate ability. Similarly, I doubt that a doctor's last job before med school has much predictive value to his wage after becoming a doctor.

[st]

"For example, MBA programs can be compared not by earnings of graduates, but by the increase in earnings of graduates compared to what they earned before entering an MBA program. This shift in the earnings measure would help control for the quality of students in a program (the Financial Times' rankings of MBA programs are based partly on this measure of value added). "

The statement help me to understand why some of the MBA program ads showed 55% of international students with prior salary of 22,000 per year (what kind of MBA candidates with average 5 year - or minimum 3 years of relative experiment would earn 22K per year in US?)... The potential benefit of the "program" is indeed very large...

[heski]

FWIW We have been working on a paper for a while, where one motivation was to ask how can such rankings make consumers worse off when consumers are not forced to use this information? To me at least there are two plausible explanations - one is that consumers use this information inappropriately (they put "too much" weight on the rankings or otherwise have incorrect beliefs even on average). The other explanation (and the one that we explore in our paper http://pages.stern.nyu.edu/~hbar-isa/hbigcvccheap.pdf) relies on quasi-externalities.

In our model, the information that I gather and the way I use it affects a school's investment decisions and therefore all other potential consumers. This is in an externality. As ever when there are externalities and we're in the funny world of the second best, odd things can happen. In particular, a fall in the cost of acquiring information can make everyone worse off (another effect noted but under-explored in the current version of the paper is that everyone can benefit from diversity in preferences).

One concern with this story (already alluded in Becker's typically clear and insightful discussion) is the question of why a "better" intermediary does not arise. There are a number of responses here - our story relies on heterogeneity among consumers and so presumably we would need a few different information intermediaries (and if there are fixed costs of setting one up . . .) However, the more compelling argument to me, is that technologically some things are just easier to describe and rank than others (I may be able to tell you something about salaries at the end of the MBA, but ranking how much "fun" you will find your class is likely to be trickier though it's still something that if you talk to enough current students you might get some sense of; or to use an old example (gleaned from Scitovsky's Joyless Economy) it's easy for me tell you the calorific value of food though (at least if you’re European!) that may be of little interest to you in trying to figure out whether or not you want to eat it).

[RSM]

There have been numerous attempts over the years to challenge USNews dominance in the college rankings game. But consumers have an interest having a single "definitive" rankings list -- it clearly defines the playing field for college admissions. If there were several competing lists, none would wield much influence (or be of much worth) because one list's rankings could be undermined by another's, and soon no apples-to-apples comparisons would be possible. Methodology aside, the true power of the USNews rankings is that consumers have made it the default "official" ranking -- a formidible barrier to the entry of competitors.

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