Costs and efficiency in English higher education: An analysis using latent class stochastic frontier models

The purpose of this paper is to provide an in-depth study of the cost structure and efficiency of English higher education institutions (HEIs). We are particularly interested, given the change in the composition of the sector, in how costs structures and efficiency vary by mission group. Previous work has focussed on pre-determined mission groups; but that is not necessarily satisfactory as mission groups were often formed historically, and universities which may once have had similar missions may not necessarily have similar outlooks today. To this end we use a panel of data from the English higher education sector
from 2002/03 to 2010/11 to estimate a cost function for English HEIs using the latent class
variant of the stochastic frontier model. This allows us simultaneously to (i) identify clusters
of institutions, based on what the data tell us, (ii) evaluate the parameters of the cost
function for each cluster, thence evaluating also measures of economies of scope and of scale
within each cluster, and (iii) measure the efficiency of each institution, both relative to other institutions in the same cluster and relative to all other institutions in the analysis.