"Debt"-ucation: the truth about education loans

In their paper "Industrial Organization of Congress," Weingast and Marshall sited opportunism as one of the two main costs to firms of purchasing production inputs in the marketplace. We defined opportunism as "the conscious practice of taking advantage of circumstances, often without regard to principles or morals."

Opportunistic practices can take on many forms in many different situations. One example comes up in this article discussing the illegal and immoral practices of a college chain that has left many students in serious debt (This is a very long article, but it is only necessary to read the first half or less to get the main idea and see the relevance to public choice). As the article explains, Corinthian colleges is a college chain that serves as the parent company to many colleges around the country. Its colleges, such as Everest University, act as its "agents" to the employ admissions officers as manipulative sales agents to persuade prospective students to enroll, promising a better future, job security, and better salaries. Rather, these sales tactics are "designed to capitalize on their [the students'] poverty and their trust in an accredited university" (paragraph 12). Students take out large loans with the expectation of support from the university in obtaining the means to repay these loans, but are instead ending up thousands of dollars in debt with no escape route, and are graduating without any good job prospects, often returning to low-paying jobs or unemployment. Students are even misled to believe that they are secured by certain grants and financial support, when really these grants are simply large loans, leaving them in debt they were not aware existed.

The opportunism in this situation is clear. People who have no intention of enrolling in these colleges are manipulated and persuaded through unethical sales tactics by admissions officers and university marketing teams who take advantage of the circumstances of lower-class citizens in order to meet strict enrollment quotas designated by their employers. They have asymmetric information and hidden intentions that are not revealed to students upon enrollment, causing students to end up in "contract commitments" they cannot afford. While law suits have been filed, and Corinthian colleges is being shut down by the federal government, this does not relieve the many students of their loan debts up to tens of thousands of dollars. The costs of opportunism these students have incurred are far higher than any benefit they received from these colleges.

The Principal-Agent Problem and Shirking in the Property Market

This 2009 article discusses the derogatory findings that the Office of Fair Trading found and published when researching the state of the property market in the United Kingdom. The report discusses how real estate agents are known to incorrectly describe the homes that they are selling by “modifying promotional photos or falsely claiming [the homes] have central heating…In one particularly audacious pretence the advert for a fisherman's cottage in Dungeness, Kent, failed to mention the two nuclear power stations just 100 yards away.” The article goes on to discuss how many consumers are looking into alternative ways of buying and selling houses because they are fed up with the dishonesty of real estate agents. The OFT market study report illustrated that “although the majority of sellers still used a high street agent…more than a third initially considered selling their home privately, using an online estate agent or selling their property at an auction. [The report] said there was a marked increase in interest in online estate agents compared with when it last carried out a survey on the issue in 2004.” However, the article closed by enunciating a huge contradiction that the research found; the research also saw consumer satisfaction with real estate agents actually increase during the past 5 years.

This article struck me as interesting in relation to our class discussion on the principal-agent problem and shirking. In class, we discussed how the agent (in this case the real estate agent)’s utility function is different from the principal (the person buying or selling the house)’s utility function, and therefore economic history has shown that the agent will always want to maximize his utility function above all else (aka above best serving the needs of the real estate consumer). The first part of this article that discusses how real estate agents are providing false information to consumers about properties in order to simply sell a house so that they can get their commission proves that there is evidence that real estate agents shirk. The consumer’s preference would be to know everything about a house before buying it, and because a real estate agent serves his own interests (aka increasing his salary) ahead of the principal’s preference, he shirks.

However, the conclusion of this article, which highlights the increasing consumer satisfaction levels with real estate agents, provides evidence that the principal-agent problem is not really a problem in the real estate market. As consumers realize the shirking of their real estate agents, they become more open to other ways of buying/selling homes (like using an online agent or service), and thus they create incentives for real estate agents to act on behalf of consumer preferences. The real estate agent knows he can be monitored by his consumer and is aware that if he shirks too much, he will lose his client to online real estate agents/other more honest real estate agents; thus the agent now has an incentive to maximize consumer preferences and decrease his own dishonest practices, which probably caused the increase in consumer satisfaction with real estate agents. Through this analysis of the article, one finds evidence that the “strict view of representative behavior” holds to a certain extent in the property market, despite some shirking by the real estate agents. The article provides evidence of some degree of shirking by real estate agents, but also claims that those agents who do shirk are in the minority. It will be interesting to see if real estate agents’ shirking completely disappears in the future because of the ease with which consumers can switch to online real estate markets due to technology advances.