Why Do Professors Have Tenure?

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One characteristic of universities that makes them different from a lot of other employers is that they provide a benefit to professors known as tenure. This benefit provides job security. The termination of a tenured professor can only occur in specific (and often rare) circumstances. This naturally raises two questions:

1. Why does tenure exist?

2. Should professors be given tenure as a benefit?

A natural response to these questions is to treat them as one and the same. For example, if you ask a lot of professors these questions, they will say that the reason tenure exists is to give professors academic freedom and academic freedom is desirable. On some level, that argument makes sense. However, that answer doesn’t really hold up against careful scrutiny.

One might begin such scrutiny by thinking about what the term “academic freedom” means. People seem to have the following idea in mind. Professors, as researchers, might have important questions about science or society or policy. In the course of their research, these professors might find answers to these questions that are unpopular to administrators or policymakers or other people in positions of authority. If professors can be punished for coming up with these answers, then many will simply decide not to ask certain questions in the first place. This is potentially costly to society since the answers to these questions might provide important truths about the world. Put differently, academic freedom is typically cast as the protection from punishment of those in the pursuit of truth.

I must admit that this description of academic freedom sounds pretty powerful and awesome. But are professors the only people in the “truth” business? Almost certainly not. (The postmodernist professors even deny that there is such a thing as objective truth, but let’s ignore that.) There are certainly other professions that have some claim on the pursuit of truth. Detectives try to figure out who committed a particular crime. Investigative reporters certainly see themselves as in pursuit of truth. But I have yet to see a tenure announcement for an investigative reporter on the local news.

Thus, since other truth-tellers don’t seem to be given the same reward as professors, the question of why tenure exists must have to do with something other than truth.

Armen Alchian provided a different answer: property rights. Most universities are operated as not-for-profit. As such, there is no person or group of people who have a claim to any of the excess revenue over costs. As a result, those in positions of authority at the university face different incentives and feedback mechanisms than their counterparts at for-profit firms.

Consider an example. Suppose a manager at a for-profit business decided to terminate workers for frivolous reasons. This would no doubt lower the productivity of the firm since (1) some of the frivolous firing would affect high-productivity workers, and (2) it would discourage high-productivity workers from putting forth their best effort since such effort is not rewarded. The move would also likely benefit the firm’s competitors who could hire these newly available high-productivity workers. This seems like the sort of thing that would affect the firm’s bottom line. The owners of the firm would be angry and are likely to find a new manager. The cost of the frivolous terminations to both the manager and the shareholders seems quite high.

At a not-for-profit firm, such as a university, the cost of frivolous firings by university administrators is likely to have a lower cost for the administrator than the manager of a for-profit firm. Since there is no residual claimant, the effect on the university’s bottom line from frivolous firings isn’t likely to provoke the same response that it does in the for-profit firm. In addition, the university administrator can always point to things “more important than the bottom line” as justification for his or her behavior.

The law of demand teaches us that when the cost of an action is lower, we will see more of that sort of action. Thus, since there is reason to believe that the cost of frivolous firings by administrators is lower at not-for-profit universities than managers at for-profit firms, one would expect more frivolous firings at universities.

Tenure is a potential solution to this problem. It protects professors from frivolous firings. However, tenure is not without costs and these costs will vary across individuals.

Tenure effectively guarantees employment. This guarantee has value. A professor might be willing to give up some salary in exchange for tenure. The effect of tenure on salary warrants some discussion.

By offering tenure, an employer might potentially attract low productivity workers. Since individual workers have more information about their marginal productivity than do employers, this information could be hidden from the employer prior to the award of tenure. This explains why universities hire professors on a probationary basis after which the professor can apply for tenure. This probationary period provides a means of assessing productivity prior before the university agrees to award tenure.

For the professor, the rate of increase in pay after tenure is likely to be lower than the rate of increase in the market wages of professors more generally. The reason is that tenure is itself a form of compensation. This is the means that professors do give up some future salary in exchange for tenure.

Since professors differ in terms of productivity post-tenure (even among those who demonstrated the level of productivity to have it awarded), the decline in salary relative to the counterfactual will tend to coincide with the value of the benefit to the average professor. This means that high productivity professors are likely to be underpaid relative to their marginal product. This is because the value of tenure is lower to these professors. Lower productivity professors are likely to be overpaid since the value of tenure is substantially higher for them given their lower marginal product.

While all of this might explain why tenure exists, it says nothing about whether tenure should exist. This is a more complicated question. On the one hand, if professors and their not-for-profit employers agree to contracts that include tenure, perhaps there is no need to concern ourselves with questions of “should.” On the other hand, these not-for-profits known as universities are often funded by the state.

The involvement of the state in funding makes issues related to universities inherently political. To the extent that frivolous decision-making is decision-making that is detached from objective evaluation, political decisions are more likely to be frivolous than non-political decisions. Thus, one would expect to see tenure more prevalent at publicly-funded institutions.

Nonetheless, there is also something to bear in mind. Publicly-funded institutions that grant tenure do so at a cost: the loss of the ability to terminate people for both frivolous and non-frivolous reasons. The cost of giving up frivolous terminations is likely low since there are offsetting costs in terms of political repercussions. On the other hand, giving up the ability to terminate professors for non-frivolous reasons (or at least making it substantially costly to do so) is something that might come at a significant cost to the politician.

This point is important. Politicians might be willing to give up the ability to terminate these state employees called professors if they believe that doing so will produce a better product. This is just an example of mutually beneficial exchange. However, given that this involves politics, the definition of “better product” is murky. This term likely means “a product that makes the constituents happy,” which itself might be frivolous.

Professors and university administrators are often shocked when politicians intervene in tenure cases or threaten to remove tenure as a benefit offered to professors. Their shock is likely driven by their erroneous belief that tenure is about high-minded ideals like academic freedom rather than property rights. Those who recognize that tenure is about property rights will recognize that politicians are likely to threaten or actually renege on the commitment to tenure if the benefits of doing so are substantially high. Nonetheless, this is akin to an optimal stopping problem. Politicians likely want to wait until the benefits of reneging are sufficient high before acting since reneging will entail a significant (and possibly irreversible) fixed cost.

In short, given their role in funding universities, it shouldn’t be surprising that politicians periodically interject themselves into university business.

There is no doubt that some readers might remain unconvinced of this argument. All of this might make for a compelling narrative for a price theory newsletter, but what evidence is there that tenure has anything to do with property rights? Maybe it really is just about the high-minded ideal of academic freedom. Well, let’s consider the two hypotheses contained in this narrative. If Alchian’s theory is correct, then one would expect it to be more likely that people get tenure in not-for-profit institutions than for-profit firms. Also, one would expect it to be more likely that tenure is awarded in publicly-funded institutions than in privately-funded institutions. In a recent paper in the Journal of Corporate Finance, William Brown tested these hypotheses. He found support for each of them. Tenure, it seems, is about property rights after all.