sustainability

Article
The Effect of Tuition Fee Constraints on Financial
Management: Evidence from Korean
Private Universities
Young-Hwan Lee 1 , Kwon-Sik Kim 2 and Kwang-Hoon Lee 3, *
1 Department of Social Welfare, Won-Kwang Health Science University, Iksan 54538, Korea;
[email protected]
2 Korea Small Business Institute, Seoul 07074, Korea; [email protected]
3 Department of Public Administration, Kangwon National University, Chuncheon 24341, Korea
* Correspondence: [email protected]; Tel.: +82-10-5453-9125




Received: 13 May 2020; Accepted: 15 June 2020; Published: 22 June 2020


Abstract: This study examined the effect of tuition fee control policy on universities’ financial
management. Using data from 93 private universities in Korea from 2006 to 2015, we investigated the
effect of tuition fees and government subsidies on labor cost, operating expenses, research expenses,
and so on. Based on principal and agency theory, we used the analysis of average percentage
change in expenditure and panel data analysis with the help of a Least Squares Dummy Variable
(LSDV) model and polynomial regression. The results show that the increase rate of tuition fees
decreased after 2011, with government subsidies increasing. The LSDV analysis indicates that
universities increase labor costs, operating expenses, and student support fees, while there are no
differences in research expenses, laboratory fees, and expenditures from investments and other
assets. Polynomial regression reveals that, based on resources, universities behave differently in their
spending. With these results, this study suggests a method to lessen information asymmetry and
goal conflict, such as a performance-based research system and an incentive-based budget system
in universities.

Keywords: tuition fee control policy; financial management; principal–agency model

1. Introduction
As tuition fees have increased over the years, they have become a cause for concern for students
and families [1]. These concerns have led to a call for attention on government policy to address
tuition fee escalation. Recently, tuition fees have become one of the most pressing issues in higher
education [2]. Multiple studies have explained the driving factors of tuition fee increase, such as
the reduction of state appropriations and the increase of institutional spending on services, facilities,
and compensation [3]. Among these, the reduction of government appropriations has been recognized
as a major contributing factor of tuition fee increase [4,5].
In South Korea (hereafter Korea), the situation is different from in other countries. University
tuition fees have increased by more than the inflation rate from 2000 to 2010. Similar to other countries,
the fee increase has led to parents and students being concerned and becoming the targets of political
and social controversy. Finally, in 2011, the Higher Education Act of Korea was amended to restrict
the increase rate of tuition fees to be below a certain level. Since 2011, a few universities reduced
their tuition fees by about 5–10%. While the government began controlling the increase of tuition fees,
it also increased its financial support to universities through government subsidies using formula
funding, which has since been reinforced. As Kim and Ko [2] indicate, tuition control policy is most

Sustainability 2020, 12, 5066; doi:10.3390/su12125066 www.mdpi.com/journal/sustainability

Sustainability 2020, 12, 5066 2 of 19

effective when it is linked with financial aid and provides incentives to limit tuition fee increase; Korean
universities tend to follow tuition control policy in order to receive government financial aid.
However, as the expectations placed on universities are on the rise [6], the demands for financial
expenditure have also increased. This coupling of tuition fee control and the increased demands
presents a significant challenge to higher education institutions in Korea. This challenge is particularly
problematic for Korean universities, for which tuition fees form the vast majority of institutional
operating budgets, and which have limited the options to create other revenues. In particular,
the decline of school-age populations has become a serious burden to universities, whose finances
significantly depend on tuition fees. Although universities are making an effort to diversify their
sources of financing, in reality, it is not easy for universities to create new sources of revenue. In this
situation, it is desirable for universities to set their financial priority on student performance, which is
important for formula funding to receive government financial support and for reserved students.
As part of their efforts to attract reserved students, universities have to allot their expenditure on
student services and education. However, under such financial constraints, this can lead to cuts in
spending on student education. This approach is frequently undertaken in the name of cost reduction
by decreasing course and program offerings and by reducing library and student services [7]. It has
been argued that cuts in these areas negatively impact the quality of education and the university’s
reputation, and impair the core mission of research, teaching, and service [8]. It is necessary to
empirically analyze the impact of tuition fee control policy on internal financial management. Thus far,
numerous studies have investigated the factors of tuition fee increase [4,9], the impact of tuition
control policy [2], and the effect of tuition fees on university attendance [10]. However, there is limited
knowledge about the effects of tuition fee policy on university financial management.
This study examines the characteristics of income and expenditure in university finances with
respect to tuition fee control policy. Specifically, this study explores which expenditures have been
reduced and which are being maintained or have increased, and how the characteristics of financial
management in universities have changed after tuition fee control. In analyzing these issues, this study
uses the principal–agency theory, which is an appropriate framework for analyzing the relationship
between government and universities [11]. Using this theory, this study examines whether there are
opportunistic behaviors or moral hazard from the agent.
To enhance a university’s competitiveness, provide high-quality education, and increase financial
sustainability [12,13], it is necessary to efficiently and stably manage the university’s finances. Financial
management in universities, as a key area of university management, can be defined as a series
of economic activities by universities in order to secure, distribute, spend, and evaluate finances
necessary for producing and supplying higher education services to fulfill educational purposes.
This study investigates the link between tuition fee control and the financial management of universities.
By analyzing the impact of tuition fee control policy on the university’s financial management, the study
shows how universities respond strategically to fiscal constraints. In doing so, it will enhance our
understanding of financial management in universities as well as universities’ behavioral characteristics.
In addition, it is expected to provide a new perspective on the universities’ strategic behaviors.
The rest of this study is organized as follows: Section two reviews prior literature about tuition fee
policy and its effect on universities. Section three discusses Korean tuition fee policy and the theoretical
framework. Section four describes the data. The estimation method is presented in the fifth section,
while the sixth section presents the results and identifies the main policy implications. The final section
provides the conclusions.

2. Literature Review
As tuition price increase has accelerated beyond inflation and family incomes, tuition policy
has become a pressing policy issue in higher education [2]. College prices and costs have become a
major political issue at the national level [14]. Along with policy concerns about tuition, the academic
community has made various efforts to address this issue. Focusing on tuition setting is a complex
Sustainability 2020, 12, 5066 3 of 19

and ambiguous process, and numerous studies have explored the factors that influence the level
of tuition fees. For example, Mumper [3] investigated the driving factors of tuition fee increase,
such as reduced state appropriation and increased institutional spending on services, facilities,
and compensation. Haptman [4] explained tuition fee increases as being caused by consumer prices,
the use of expanded and improved services, and so on. While these studies focused on the factors of
tuition fee increase, other studies examined the effects of state policies on tuition fee control, such as
curbs, caps, and freezes [15], as well as financial aid and incentives [16]. For example, Kim and Ko [2]
analyzed the impacts of state control polices on college tuition fee increase using data from 50 states
and 540 public four-year universities and colleges. Using hierarchical multiple regression analysis,
they examined the effects of state policy on tuition change and concluded that linking tuition to
financial aid and providing incentives to limit the tuition fee increase are effective in controlling tuition
fees. Interestingly, this study provides the evidence that the state’s tuition cap policy can adversely
affect tuition.
Several studies investigated the effects of tuition fees on university attendance [10,17],
enrollment [18], intentions of degree [19], and quality [20]. Dearden et al. [10] studied participation
rates with respect to the level of tuition fees in the UK. Using fixed effects regression, they found that
fees have a significant adverse effect on university participation. Yoo [21] reported that introducing
the half-price tuition policy in Korea is against the benefit principle and creates the contradiction
of high school graduates supporting college graduates. He stated that this regulation causes side
effects, such as increased youth unemployment due to academic inflation, delays in the restructuring of
insolvent colleges, an increase in repeaters due to excess demand for college education, and an increase
in private education expenses. Görgen et al. [18] investigated the effect of the introduction of tuition fees
on university student enrollment behavior. In order to identify potentially relevant factors and control
in a short time frame, this study used the Lasso technique and used spatial cross-effects in a fixed effects
panel model for the enrollment analysis. Using this methodology, this study presented significant
negative effects of tuition fees, inducing an up to 4.5% percentage point reduction in enrollment
rates. Bahrs and Siedler [19] analyzed the effect of tuition fees on the intention to acquire a university
degree. Using data from Youth Questionnaire of the German Socio-Economic Panel, they analyzed
the different effects of the introduction and elimination of university tuition fees in Germany with
difference-in-difference settings. The result showed that tuition fees have a negative effect on the
intention of 17-year-olds to acquire a higher educational degree. Gawellek et al. [20] examined the
impact of the introduction of modest tuition fees on perceived instructional quality. To analyze the
effect of tuition fees on instructional evaluation ratings, they adopted the difference-in-difference
method and found that the instruction of fees in a publicly financed system has a significantly positive
impact on faculty evaluation.
If these studies focused on the effects of tuition fee policy, others investigated financial management
in universities under fiscal constraints. Government pressure and control of tuition fees combined
with decreased government funding have led universities into an unprecedented situation [22].
Responding to this situation, universities have been motivated to seek alternative revenues from
research funding [23], donations, and financial investment [24]. In addition to these efforts, universities
have modified their budget systems from incremental budget systems to decentralized budget models.
A number of universities have adopted responsibility center management (RCM), which devolves
both budget responsibility and decision-making authority in ways that motivate lower-level actors
to meet larger organizational goals [7]. Using RCM, universities aim to increase the responsibilities
of organizational subunits by devolving ownership of revenues and costs to encourage revenue
generation and cost effectiveness, as well as enhance transparency about budget allocation and financial
flexibility [25]. Accordingly, numerous studies have examined the implementation challenges of
RCM [7,26], its benefits and drawbacks [27,28], and its effect on revenue and student satisfaction [25,29].
For example, Ozan et al. [29] analyzed the effect of RCM adoption on tuition revenue at four public
universities, namely Iowa State University, Kent State University, the University of Cincinnati, and the
Sustainability 2020, 12, 5066 4 of 19

University of Florida. Using the synthetic control method approach, they concluded that RCM
positively affected tuition revenue at all universities except the University of Florida.
Sustainability  2020,  9,  x  FOR  PEER  REVIEW    4  of  18 
Previous studies have provided valuable insights to universities by analyzing the tuition control
policy, its effects, and universities’ financial management under fiscal constraints. However, to the best
approach, they concluded that RCM positively affected tuition revenue at all universities except the 
of ourUniversity of Florida. 
knowledge, no empirical   research has established a causal link between tuition control policy
and university financial management. This study aims to analyze the effect of tuition control policy
Previous studies have provided valuable insights to universities by analyzing the tuition control 
policy, its effects, and universities’ financial management under fiscal constraints. However, to the 
on university financial management using the principal–agent model. Until now, multiple studies
have best of our knowledge, no empirical research has established a causal link between tuition control 
analyzed the relationship between government and university by applying the principal–agent
policy and university financial management. This study aims to analyze the effect of tuition control 
model [30–32]. For example, Liefner [30] analyzed the form of resource allocation and performance in
policy  on  university  financial  management  using  the  principal–agent  model.  Until  now,  multiple 
universities using the principle–agent theory. He attempted to explain who the principal and agent are
studies  have  analyzed  the  relationship  between  government  and  university  by  applying  the 
in higher education from a theoretical perspective, and recognized that the assumptions concerning
principal–agent  model  [30–32].  For  example, Liefner  [30]  analyzed  the form  of  resource allocation 
goal conflicts and information asymmetries are especially relevant in the higher education context.
and performance in universities using the principle–agent theory. He attempted to explain who the 
Gornitzka et al. [32] introduced the principal–agent theory between state and higher education and
principal and agent are in higher education from a theoretical perspective, and recognized that the 
analyzed the sphere
assumptions  of contract
concerning  arrangements
goal  conflicts  between
and  information  state andare 
asymmetries  higher education
especially  institutions.
relevant  in  the 
Usinghigher education context. Gornitzka et al. [32] introduced the principal–agent theory between state 
concepts such as moral hazard and information asymmetry, they analyzed the contract
and higher education and analyzed the sphere of contract arrangements between state and higher 
arrangements in Finland, Sweden, and Denmark. The major concepts of principal–agent theory
education 
can help institutions.  the
in understanding Using  concepts  such 
relationship as  moral 
between hazard  and 
government and information 
universities,asymmetry,  they 
including university
analyzed  the  contract  arrangements  in  Finland,  Sweden,  and  Denmark.  The  major  concepts  of 
administration. This theory also provides a better understanding of the problems and implications for
principal–agent  theory  can  help  in  understanding  the  relationship  between  government  and 
university management.
universities, including university administration. This theory also provides a better understanding 
of the problems and implications for university management. 
3. Theoretical Background
3. Theoretical Background 
3.1. University Accounting System in Korea
3.1. University Accounting System in Korea 
To analyze the effect of tuition fee and government financial support on university financial
management, it is necessary
To  analyze  toof 
the  effect  understand
tuition  fee accounting systems
and  government  in Korean
financial  private
support  universities.
on  university  There are
financial 
external rules governing the operation of university finance. “Special Rules on the Finance and
management, it is necessary to understand accounting systems in Korean private universities. There 
are external rules governing the operation of university finance. “Special Rules on the Finance and 
Accounting for Private Universities” are the accounting standards currently applied to private
Accounting  for  Private 
universities. According Universities” 
to this regulation, are  the  accounting 
universities havestandards 
to producecurrently 
financialapplied  to  private 
statements, such as
universities. According to this regulation, universities have to produce financial statements, such as 
balance sheets, statements of revenues and expenses, and statements of fund flow (Figure 1). In making
balance  sheets,  statements  of  revenues  and  expenses,  and  statements  of  fund  flow  (Figure  1).  In 
financial statements, the principle of double-entry book-keeping, principle of continuity, and principle
making financial statements, the principle of double‐entry book‐keeping, principle of continuity, and 
of clarity are applied.
principle of clarity are applied. 

 
Figure 1. The structure of financial statements of private universities in Korea. 
Figure 1. The structure of financial statements of private universities in Korea.
 Sustainability  2020,  9,  x  FOR  PEER  REVIEW    5  of  18 

Sustainability 2020, 12, 5066 5 of 19

3.2. Korean University Tuition Policy, Government Subsidy Mechanism   
In Korea, the fundamental philosophy and policy direction of university tuition fees have been 
3.2. Korean University Tuition Policy, Government Subsidy Mechanism
affected by the government’s university education policy in 2003. At the time, the Korean government 
liberalized 
In Korea, the  tuition 
the fees  of  all 
fundamental national  universities. 
philosophy Accordingly, 
and policy direction university 
of university tuition 
tuition fee have
fees increase 
been
rates were remarkably high in the early 2000s. 
affected by the government’s university education   policy in 2003. At the time, the Korean government
Beginning in 2009, the government began controlling the increase of university tuition fees, and 
liberalized the tuition fees of all national universities. Accordingly, university tuition fee increase rates
thus,  the  rates  of 
were remarkably increase 
high in thehave 
earlybeen  slowing  down.  One  of  the  biggest  complaints  of  education 
2000s.
consumers regarding university tuition fee policy is that the portion of tuition fees takes up too much 
Beginning in 2009, the government began controlling the increase of university tuition fees,
of  a 
and thus,university’s 
the ratesfinances 
of increaseand have
that been
there slowing
is  an  unequal  financial 
down. One of theburden 
biggestbetween  the  university’s 
complaints of education
founders  and  beneficiaries.  Moreover,  due  to  the  lack  of  persuasive 
consumers regarding university tuition fee policy is that the portion of tuition fees takes tuition  fee  appropriation 
up too much
ofmethods, the grounds for appropriation are vague, and education consumers have many complaints 
a university’s finances and that there is an unequal financial burden between the university’s
foundersthe 
about  andunclear  appropriation 
beneficiaries. Moreover, and 
dueoperation 
to the lackprocess  due  to tuition
of persuasive supplier‐led  tuition  fee methods,
fee appropriation policy 
management [33].   
the grounds for appropriation are vague, and education consumers have many complaints about the
unclear Finally, considering the effect on prices, the government put a ceiling on tuition fee increases 
appropriation and operation process due to supplier-led tuition fee policy management [33].
and revised the Higher Education Act. According to the Higher Education Act: “No school shall set 
Finally, considering the effect on prices, the government put a ceiling on tuition fee increases and
the rate of increase in tuition fees at a level exceeding 1.5 times the average consumer price inflation 
revised the Higher Education Act. According to the Higher Education Act: “No school shall set the
for the three preceding years”. Furthermore, the Ministry of Education has implemented a tuition fee 
rate of increase in tuition fees at a level exceeding 1.5 times the average consumer price inflation for
control  policy  through  state  scholarships  and  a  financial  support  project.  To  receive  a  state 
the three preceding years”. Furthermore, the Ministry of Education has implemented a tuition fee
scholarship,  it  is  necessary  to  freeze  tuition  fees  at  the  least.  Students  can  receive  more  state 
control policy through state scholarships and a financial support project. To receive a state scholarship,
scholarships only if universities make constant efforts to reduce tuition fees or increase scholarships 
it is necessary to freeze tuition fees at the least. Students can receive more state scholarships only if
[34]. 
universities make constant efforts to reduce tuition fees or increase scholarships [34].
In addition, the government uses financial support as a tool for university control. Around 2010, 
In addition, the government uses financial support as a tool for university control. Around 2010,
the government increased the amount of financial support to universities and changed the way to 
the government increased the amount of financial support to universities and changed the way to
distribute financial support. “Formula funding” and “block grant” schemes were implemented, and 
distribute financial support. “Formula funding” and “block grant” schemes were implemented, and the
the  rate  of  tuition  increase  rate  was  used  as  the  key  indicator  in  the  selection process  for  support 
rate of tuition increase rate was used as the key indicator in the selection process for support recipients.
recipients. In this situation, universities may not be able to raise tuition fees and may be requested to 
In this situation, universities may not be able to raise tuition fees and may be requested to lower their
lower  their  tuition  fees.  Combined  with  tuition  fee  control,  universities  face  an  unprecedented 
tuition fees. Combined with tuition fee control, universities face an unprecedented situation—a decline
situation—a  decline  in  school‐age  population.  Due  to  the  dramatic  decline  of  the  school‐age 
in school-age population. Due to the dramatic decline of the school-age population, the school-age
population,  the  school‐age  population  saw  an  11.3%  decrease  in  2018  compared  to  2013,  and  the 
population saw an 11.3% decrease in 2018 compared to 2013, and the increase rate of student numbers
increase rate of student numbers in private universities is lower than in public universities (Figure 
in2). 
private universities is lower than in public universities (Figure 2).

 
Figure 2. TheFigure 2. The number of students in private and public universities in Korea. 
number of students in private and public universities in Korea. Source: Korean Education
statistic service, https://kess.kedi.re.kr/eng/index.
Sustainability 2020, 12, 5066 6 of 19

These trends will be a burden to universities because most of a university’s income depends on
tuition fees. This decrease will translate into a financial burden to universities. Attaining government
projects has thus emerged as a major goal for universities to secure; government subsides have become
a major factor for the survival and sustainability of universities.
The financial structure of Korean universities is highly dependent on tuition fee income, while the
ratio of government income has been increasing in recent years. In 2006, the tuition fee income from all
private universities was 11,042,157 million KRW, which accounted for 68.8% of all income. In 2006,
transfer and endowment income was 1,696,934 million KRW, which was 10.6%. However, in 2015,
tuition fee income was 13,657,620 million KRW (56.9%), while transfer and endowment income was
5,712,058 million KRW (23.8%). The ratio of transfer and endowment income seems to have increased
due to the increase of government subsidies (Table 1).

Table 1. Annual income of private universities (Unit: million KRW).

Category 2006 2007 2008 2009 2010

Tuition fee income 11,042,157 11,740,739 12,670,596 13,160,818 13,735,532
Government transfer and
1,696,934 1,872,182 2,001,802 2,531,757 2,619,801
endowment income
Education-related
423,100 479,569 536,024 625,224 718,247
administrative fee income
Non-education income 637,659 756,620 832,873 878,081 806,131
Income from investments and
773,985 993,405 744,290 895,250 980,278
other assets
Income from sale of fixed assets 94,701 89,610 41,390 28,896 36,678
Receipts for current liabilities 2057 2090 3043 644 2644
Receipts for fixed liabilities 102,857 98,865 186,425 150,581 203,458
Unused balance carried forward
1,256,314 1,241,322 1,450,637 1,744,106 1,864,169
from the previous term
Category 2011 2012 2013 2014 2015
Tuition fee income 13,724,007 13,781,492 13,725,653 13,395,827 13,657,620
Transfer and endowment
2,704,543 3,994,669 4,686,934 5,168,779 5,712,058
income
Education-related
766,296 924,573 990,304 1,004,594 1,079,303
administrative fee income
Non-education income 803,171 739,496 578,832 547,841 425,648
Income from investments and
1,629,779 1,230,731 1,082,146 1,348,758 1,404,353
other assets
Income from sale of fixed assets 25,073 65,699 59,364 156,265 155,745
Receipts for current liabilities 635,149 345,378 2865 1466 1538
Receipts for fixed liabilities 239,273 137,209 220,868 180,160 169,693
Unused balance carried forward
1,852,146 2,144,458 1,950,733 1,448,032 1,335,294
from the previous term
Source: Private School Financial Data System.

Regarding expenditure, in 2006, remuneration was 6,078,237 million KRW, which accounted
for 37.9% of all expenditures, and management and operating expenses were 1,683,451 million
KRW, which was 10.5%. Expenditure on research and students was 2,846,651 million KRW (17.7%)
in 2006. However, in 2015, remuneration was 9,299,141 million KRW (38.8%), management and
operating expense was 2,532,611 million KRW (10.5%), and expenditure on research and students was
7,527,429 million KRW (31.4%). This rapid increase in expenditure on research and students may have
been due to the increase in state scholarships (Table 2).
Sustainability 2020, 12, 5066 7 of 19

Table 2. Annual expenditures of private universities (Unit: million KRW).

Category 2006 2007 2008 2009 2010

Remuneration 6,078,237 6,326,260 6,818,692 7,273,686 7,735,373
Management and operating expenses 1,683,451 1,830,510 1,998,206 2,131,326 2,304,174
Expenditure on research and students 2,846,651 3,141,699 3,476,399 4,017,846 4,270,347
Non-education expenses 147,816 152,705 169,697 205,459 176,330
Transfer expenses 23,793 17,436 14,682 31,671 29,612
Expenditure from investments and
1,464,843 1,755,249 1,770,188 1,895,335 1,761,906
other assets
Fixed asset purchase expenses 2,345,657 2,465,258 2,458,940 2,483,390 2,603,733
Repayments for current liabilities 11,512 10,968 14,302 12,282 17,301
Repayments for fixed liabilities 101,982 133,637 118,034 114,185 112,007
Unused balance carried forward to
1,325,820 1,440,680 1,627,939 1,850,177 1,974,108
the following term
Category 2011 2012 2013 2014 2015
Remuneration 7,966,689 8,590,134 8,895,711 8,865,079 9,299,141
Management and operating expenses 2,420,198 2,536,298 2,531,540 2,477,145 2,532,611
Expenditure for research and students 4,570,886 5,851,675 6,607,738 7,039,274 7,527,429
Non-education expenses 160,657 125,146 111,182 100,329 93,943
Transfer expenses 16,061 4413 5188 6001 6485
Expenditure from investments and
1,884,229 1,294,934 1,224,080 1,354,988 1,417,681
other assets
Fixed asset purchase expenses 2,568,536 2,528,381 2,208,582 2,097,255 1,799,602
Repayments for current liabilities 8244 8570 10,091 14,829 23,231
Repayments for fixed liabilities 168,805 150,449 142,292 227,812 144,819
Unused balance carried forward to
1,997,045 1,950,127 1,562,814 1,272,696 1,119,711
the following term
Source: Private School Financial Data System.

3.3. Conceptual Framework

This study aims to examine the characteristics of financial management in universities with
regard to constraints on tuition fees and increase of government subsidies using the agency theory,
which originates from studies by Ross [35] and Jensen and Meckling [36]. Traditionally, the principal–
agent relationship is regarded as a contractual relationship [36]. In a comprehensive sense, the agency
problem is caused when a certain agent depends on the action of another person in a principal–agent
relationship [37]. The principal–agent relationship is a general phenomenon and “a pervasive fact of
economic life” [38]. Jensen and Meckling [36] indicated that the principal–agent relationship exists in
all organizations and cooperative activities, such as corporate management, universities, conferences,
and government agencies.
In the relationship between state and university, states are considered to be the principal because
the governments delegate the state’s educational goals to universities [39]. Universities were formed
and funded by the government to fulfill the need of society to create, preserve, and transmit knowledge.
The agent problem arises when (a) the principal and the agent have conflicting goals and/or (b) there is
information asymmetry between them. Universities perform diverse functions, and the organizational
goals of universities are complicated, ambiguous, and dynamic. Moreover, universities with multiple
groups that have different interests [40] reinforce goal conflict within universities. Information
asymmetry arises when the principal lacks information about the agent’s work. Universities use
diverse and complicated mechanisms in their production [41], and use intensive technology that
requires various skills. Universities have the characteristics of joint production, in which various
outputs are produced at once [42]. Due to these characteristics, the process through which professors
produce and provide knowledge is difficult to monitor and control [30]. These factors lead to
information asymmetry.
Sustainability 2020, 12, 5066 8 of 19

Goal conflict and information asymmetry activate the possibility of agent problems, such as
adverse selection and moral hazard. These problems can be illustrated using the model of revenue
theory of cost [43] and the utility-maximizing models [44]. For example, the revenue theory of cost
model assumes that universities raise as much money as they can and then spend it all.
In the context of the government–university relationship, the principal–agent theory could
provide a useful and applicable framework for analyzing the effects of tuition fee policy on university
financial management. Agency problems that may occur in the relationship between government and
university or management staff and students in universities include shirking, budget maximization,
and cross-subsidization [10]. Shirking is classified into passive shirking, in which the school does not
achieve the objective pursued by the government and students, and aggressive shirking, in which the
school acts contrary to the objective desired by the government and students [45]. Some examples
include professors doing personal consulting rather than focusing on education and research for
students, or the university excessively using the budget on publicity and events rather than investing
in education and research. There are many accounts related to shirking in the expenditure accounts of
universities in Korea. First, operating expenses include welfare benefits, training costs for faculty and
staff, general service costs, business operating expenses, publicity costs, meeting costs, event costs,
missionary work costs, and other operating expenses, which are costs related to the management of the
university rather than costs invested to meet the purposes desired by the government and students,
and thus, excessive spending on these items can be regarded as a form of shirking. Expenditure
from investments and other assets is also an account to increase the financial income activities of
universities rather than investment in education and research. The pursuit of a greater budget involves
the act of making efforts to constantly increase the budget and to spend it. This can be determined
by the variation of unused balance carried forward to the following term. In cross-subsidization,
the budget that must be used for students’ education is, in fact, used for the university’s management
or operations. This includes spending the budget that must be invested in education and research
on constructing or buying a new school building, implementing a computer system to reduce the
workload of administrative staff, or increasing labor costs [22]. Accordingly, the analysis in this study
will be conducted by setting the following research question and hypotheses. Research Question:
What are the characteristics of university financial management with regard to tuition control policy?
Do universities act with moral hazard in their financial management? To analyze this research question,
this study constructs the following hypotheses.

Hypothesis 1. Universities will display shirking behavior despite tuition fee constraints.

Hypothesis 2. Universities will display budget maximization behavior despite tuition fee constraints.

Hypothesis 3. Universities will display cross-subsidization behavior despite tuition fee constraints.

4. Research Design

4.1. Data
This study analyzed private universities in Korea because private universities account for 80% of
higher education in Korea, and are under relatively tighter constraints on financial management than
national universities. The period of analysis is from 2006 to 2015, because the regulations on tuition fee
increase rates in the Higher Education Act were amended in September 2011, and there is a difference
in tuition fee increase rates before and after 2011. Although the number of universities slightly varied
by year, there were around 93 universities.
Sustainability 2020, 12, 5066 9 of 19

This study analyzed the characteristics of financial management in universities based on the
account of university expenditure. Information on the account of university expenditure was obtained
from the financial statements of universities. The financial statement of a university includes balance
sheets, statements of revenues and expenses, and statements of funds flow. This study analyzed
the financial characteristics using the statements of funds flow because this statement presents a
university’s fund income and spending for a certain period. Data regarding the funds flow were
collected from the Private School Financial Data System.
In analyzing the effect of tuition fee control, this study uses tuition fees and government subsidies
as the explanatory variables because the government started controlling tuition fees with the increase
of financial support to universities. As the dependent variables, this study uses expenditure from
investments and other assets, fixed asset purchase expenses, and labor costs, among others. Through
these variables, we can explore the characteristics of universities’ financial management under the
tuition fee control policy. For example, operating expenses include welfare benefits, training costs for
faculty and staff, general service costs, business operating expenses, publicity costs, meeting costs,
event costs, missionary work costs, and other operating expenses related to the management of the
university, rather than the costs invested to meet the purposes desired by students; therefore, excessive
spending on these items can be regarded as a form of moral hazard. In addition, expenditure from
investments and other assets also results in increasing the financial income activities of universities
rather than investment in education and research. The pursuit of a greater budget involves making
efforts to constantly increase the budget and expenditure. This can be determined by the variation of
unused balance carried forward to the following term. Table 3 provides a list of the control variables,
independent variables, and dependent variables used in this study.

Table 3. Variables and contents of analysis.

Category Variable Note

Fiscal year: 2006–2015
Size: Fewer than 5000 students = 1, 5000 to fewer than
10,000 students = 2, 10,000 students and more = 3
Control variables Finance size: Fewer than 10 billion KRW = 1,
10 billion KRW to fewer than 50 billion KRW = 2,
50 billion to 100 billion KRW = 3, 100 billion KRW to
200 billion KRW = 4, 200 billion KRW and more = 5
University establishment year
Tuition fee
Independent variables
Government subsidies
Operating expenses shirking
Expenditure from investments and other assets shirking
Fixed asset purchase expenses shirking
Dependent variables Unused balance carried forward to the following term budget maximization
Labor costs cross-subsidization
Research expenses cross-subsidization
Laboratory fees cross-subsidization
Student support fees cross-subsidization

The mean value of tuition fees is 93,513,167 KRW (one US dollar is equivalent to 1180 Korean won)
and the mean value of government subsidies is 9,853,121 KRW. Among the expenditures, labor costs
make up the largest portion (see Table 4).
Sustainability 2020, 12, 5066 10 of 19

Table 4. Descriptive statistics. (Unit: 1000 KWR).

Mean Min. Max.

Tuition fees 93,513,167 7,366,817 383,330,038
Government subsidies 9,853,121 1 66,359,084
Labor costs 60,953,790 4,532,384 482,828,806
Operating expenses 16,242,164 1,443,113 123,557,121
Research expenses 4,221,199 1 79,950,857
Laboratory fees 1,801,100 56,887 9,283,436
Student support fees 2,658,183 5029 22,782,981
Expenditure from investments
12,704,207 1 180,521,886
and other assets
Fixed asset purchase expenses 17,184,608 220,055 142,486,789
Unused balance carried
8,764,900 1 120,581,735
forward to the following term

4.2. Method of Analysis

To analyze the effects of tuition fee control policy on university financial operation, this study
used panel data. Before using the panel data regression model, this study tests the stationarity of the
data. The results of the LLC (Levin, Lin and Chu [46]) panel unit root test and Fisher stationary test
indicate that all variables satisfy data stationarity at the level of trans-log variables (see Table 5).

Table 5. Results of unit root test.

Variable LLC Fisher

Tuition fees −5.0838 *** 4.5162 ***
Government subsidies 5.5706 7.8925 ***
Labor costs −1.4675 * 0.2549 ***
Operating expenses −4.0846 *** 1.7872 **
Research expenses −10.3454 *** 3.9814 ***
Label variables Laboratory fees −5.2519 *** 6.2017
Student support fees −2.5769 ** 2.5867 **
Expenditure from investments and other assets −23.0822 *** 6.4828 ***
Fixed asset purchase expenses −9.0398 *** 9.3314 ***
Unused balance carried forward to the
−8.3428 *** 2.9690 **
following term
Tuition fee −5.8952 *** 8.9989 ***
Government subsidies −26.1368 *** 14.2754 ***
Labor costs −3.6059 *** 3.4120 ***
Operating expenses −9.0974 *** 1.8012 **
Research expenses −5.3402 *** 2.0106 ***
Log-trans variables Laboratory fees −6.4330 *** 8.4936 ***
Student support fees −5.2303 *** 1.3841 **
Expenditure from investments and other assets −12.3069 *** 10.6963 ***
Fixed asset purchase expenses −9.8209 *** 8.6506 ***
Unused balance carried forward to the
−16.2357 *** 7.5542 **
following term
Note: * p < 0.1, ** p < 0.05, *** p < 0.01.
Sustainability 2020, 12, 5066 11 of 19

As the stationary test results indicate, we use logged variables in model specification. Because
logged variables minimize the influence of outliers, they are appropriate when the distribution of a
variable is skewed. Using logged specification, the pooled Ordinary Least Square (POLS) model can
be considered. This model can be presented in the following form:

lnyit = α + βi lnxit + εit , i = 1, . . . , n; t = 1, . . . , t

where yit = university expenditure vectors, α = constant, and xit = tuition and government fund.
In the pooled OLS model, it is presumed as εit = δi + eit . However, as the data used in this research
are panel data, we can consider the panel data regression model. To use the panel data regression
model, it is necessary to consider whether δi is 0 for all panel entities. This can be done using the
Breush Pagan Lagrangran (BPL) Multiplier test. The BPL test shows that panel data analysis is suitable
in all variables. Therefore, we decided to use the panel data model, which can be written as follows:

lnyit = α + βlnxit + ui + eit i = 1, . . . , n; t = 1, . . . , t

where yit = university expenditure vectors, α = constant, and xit = tuition and government fund.
To use the panel data regression model, the Hausman test was conducted to select either the
fixed or random effects model. The Hausman test results (Table 6) show that laboratory and fixed
asset variable models are more suitable than the random effects model. Except for the two dependent
variables, all models indicate that the fixed effect is suitable.

Table 6. Results of the Hausman test.

Unused
Expenditure from
Labor Operating Research Laboratory Student Fixed Asset Balance Carried
Investments and
Costs Expenses Expenses Fees Support Fees Purchase Expenses Forward to the
Other Assets
Following Term
0.5 0.18 0.28 5.18 * 4.16 0.72 6.37 * 1.27
Note: * p < 0.1, ** p < 0.05, *** p < 0.01.

For research consistency, this research uses the fixed effect model. To analyze the effects of
individual characteristics, the time characteristic effect is used as a dummy variable. The model can be
presented as follows:

lnyit = α + ui + βlnxit + eit i = 1, . . . , n; t = 1, . . . , t (1)

where yit = university expenditure vectors, α = constant, xit = tuition and government fund,
and ui = year dummy from 2006 to 2015.
To investigate the response and behavior of universities to tuition, we estimate the marginal effects
of tuition fees and government subsidies. Using polynomial regression, the marginal effects of tuition
fees and government subsidies can be presented as follows:

lnyit = α + β1 lnπit + β2 lnπ2it + γ1 lnϕit + γ2 lnϕ2it + δlnxit + ui + εit , (2)

where yit = university expenditure vectors, α = constant, β1 = tuition fees, β2 = tuition fee square,
γ1 = government subsidies, and γ2 = government subside square.

5. Results
As a preliminary analysis, this study first examines the rate of change in variables. Tuition fees
increased by 2.54% on average compared to 2007, but government subsidies increased by 38.65%.
The percentage of government subsidies is higher than that of any other variables. This implies that
the government provides a monetary incentive to minimize tuition fee increases. Student support
fees showed a relatively significant increase compared to other variables, and a decrease after 2012.
Sustainability 2020, 12, 5066 12 of 19

The average rate of research expenses and fixed asset purchase expenses was negative. Labor costs
increased by 0.711% on average, but the rate decreased from 2011 onward. The same pattern was
observed in research expenses, fixed asset purchase expenses (Table 7).

Table 7. Change rate of variables (Unit: Percentage).

2007 2008 2009 2010 2011 2012 2013 2014 2015 Average
Tuition fee 9.092 7.794 1.304 3.883 3.386 −2.284 −0.135 0.890 −0.995 2.548
Government subsidies 8.570 36.428 100.466 19.575 7.403 107.680 39.059 20.077 8.675 38.659
Labor costs 6.505 8.107 4.458 6.322 5.941 4.715 3.357 2.310 2.461 4.908
Operating expenses 11.252 9.158 3.802 7.533 6.180 1.036 0.628 2.441 −0.980 4561
Research expenses 14.125 −5.551 1.927 1.509 2.516 −1.755 −3.494 −6.026 −4.796 −0.172
Laboratory fees 4.033 6.036 8.768 6.212 8.435 −3.512 0.278 −1.520 −3.624 2.790
Student support fees 13.043 13.765 19.309 15.078 12.918 11.496 −0.341 −0.655 1.671 9.587
Expenditure from investments
30.744 −4.078 5.594 −4.745 11.735 −32.190 −2.244 5.537 −2.232 0.902
and other assets
Fixed asset purchase expenses 8.164 −4.974 −5.409 9.149 0.230 −5.029 −9.313 −4.372 −9640 −2.355
Unused balance carried
9.675 18.619 11.833 7.212 10.941 −7.980 −22.097 −13.076 −8.729 0.711
forward to the following term

To analyze the effects of tuition fees on financial management, a fixed model was conducted first.
The control variables show different values according to each model. For example, universities with
large-scale finances would spend more money on labor, operation, and laboratory costs along with
student support fees, whereas there was no difference in research costs, expenditure from investments,
and other assets. Relating to the year of establishment, if universities were recently established,
they tend to spend less money on labor costs, research costs, laboratory fees, and expenditure from
investments and other assets. It is plausible to assume that older universities invest more money on
labor and research costs as well as laboratory fees than recently established universities.
Turning to the present study’s core focus, the impact of tuition fees turned out to be significant at
a level of 0.001 for all dependent variables, except unused balance carried forward to the following
term. This result indicates that tuition increase is positively and significantly associated with university
financial expenditure. However, the government subsidies variable shows different behaviors, as it
is only significant for variables such as labor costs, operating expenses, laboratory fees, and student
support fees (Table 8).
We estimated the effect of tuition fee control policy in universities by including a Least Squares
Dummy Variable (LSDV) model. We found that universities increased labor costs, operating expenses,
and student support fees even after 2011. However, other models, such as research expenses, laboratory
fees, and expenditure from investments and other assets, did not show significant differences from 2006.
This finding indicates that universities would be more likely to increase their labor costs, operating
expenses, and student support fees rather than increasing their research expenses, laboratory fees,
and expenditure from investments and other assets. This implies that universities show the tendency
to not invest their expenditure in long-term development. With such results, it is logical to assume
that spending cuts as a method of financial constraint are a popular strategy [7], but decreases in
expenditure are undertaken differently in terms of items.
In addition to the LSDV model, we can test whether the relationship between tuition fees and
each expenditure is nonlinear by examining the squared tuition fee variable (Table 9). Holding all
other variables constant, if tuition fee proves to be positive and tuition fee square proves to be negative,
the average expenditure will first increase as tuition fee increases, but at a diminishing rate.
Sustainability 2020, 12, 5066 13 of 19

Table 8. Results of the fixed model.

Expenditure from Fixed Asset Unused Balance

Labor Operating Research Laboratory Student
Investments and Purchase Carried forward to
Costs Expenses Expenses Fees Support Fees
Other Assets Expenses the Following Term
Estimate Estimate Estimate Estimate Estimate Estimate Estimate Estimate
Variables (Std. Error) (Std. Error) (Std. Error) (Std. Error) (Std. Error) (Std. Error) (Std. Error) (Std. Error)
−0.01476 0.02942 −0.29437 −0.03216 0.07339 0.19713 −0.0895 0.06827
2007 (0.02828) (0.03829) (0.21530) (0.05692) (0.08135) (0.27129) (0.10077) (0.33895)
−0.00123 0.05373 −0.37764 −0.04957 0.08899 0.26373 −0.03832 0.32757
2008 (0.02891) (0.03914) (0.22010) (0.05819) (0.08316) (0.27734) (0.10302) (0.34651)
0.02181 0.06809 −0.19920 −0.00080 0.17710 0.22303 −0.05294 0.78988 *
2009 (0.03016) (0.04084) (0.22962) (0.06070) (0.08676) (0.28933) (0.10747) (0.36149)
0.04474 0.10817 * −0.34752 0.02670 0.25682 * 0.45069 −0.06073 1.04254 **
2010 (0.03096) (0.04192) (0.23570) (0.06231) (0.08905) (0.29699) (0.11032) (0.37107)
0.08719 ** 0.16186 *** −0.13834 0.09393 0.33886 *** 0.29161 −0.06897 1.18069 **
2011 (0.03137) (0.04247) (0.23882) (0.06314) (0.09023) (0.30092) (0.11178) (0.37598)
0.14862 *** 0.17923 *** −0.23124 0.03539 0.34256 *** 0.01490 −0.10851 1.10039 **
2012 (0.03314) (0.04487) (0.25233) (0.06671) (0.09534) (0.31794) (0.11810) (0.39724)
0.17934 *** 0.16132 *** −0.36277 0.02197 0.31807 ** −0.22887 −0.29921 * 0.74546 *
2013 (0.03404) (0.04609) (0.25916) (0.06851) (0.09792) (0.32655) (0.12130) (0.40800)
0.19776 *** 0.16181 *** −0.33982 0.01604 0.29624 ** −0.19081 −0.37022 ** 0.57306
2014 (0.03460) (0.04685) (0.26341) (0.06964) (0.09953) (0.33191) (0.12329) (0.41470)
0.22787 *** 0.15175 *** −0.40713 0.00869 0.30619 ** 0.19899 −0.55517 *** 0.40590
2015 (0.03478) (0.04709) (0.26478) (0.07000) (0.10004) (0.33363) (0.12393) (0.41684)
0.00568 −0.16353 *** 1.07321 *** −0.39731 *** 0.12522 0.02251 −0.30039 * 0.49460
Size 2 (0.03377) (0.04573) (0.25712) (0.06797) (0.09715) (0.32399) (0.12035) (0.40480)
0.20578 *** −0.19757 ** 0.84919 * −0.46930 *** 0.16738 −0.57829 −0.24054 1.27007 *
Size 3 (0.04993) (0.06761) (0.38016) (0.10050) (0.14364) (0.47902) (0.17794) (0.59850)

Finance −0.08645 −0.04505 −1.26558 * −0.12601 0.25969 −1.34524 * −0.89541 *** −3.43467 ***
size 2 (0.07106) (0.09622) (0.54104) (0.14303) (0.20442) (0.68173) (0.25324) (0.85177)

Finance 0.11619 * 0.24477 ** −0.50636 0.48793 *** 0.54865 ** −0.34339 −0.08124 −1.35397 *
size 3 (0.06669) (0.09031) (0.50778) (0.13424) (0.19186) (0.63983) (0.23767) (0.79941)

Finance 0.56976 *** 0.37265 *** −0.14532 0.64218 *** 0.60163 ** 0.52592 −0.06373 −2.31693 *
size 4 (0.07855) (0.10636) (0.59806) (0.15811) (0.22597) (0.75359) (0.27993) (0.94155)

Finance 0.62062 *** 0.82258 *** −0.41478 0.51976 *** 0.83239 *** 0.47565 0.63097 * 0.31588
size 5 (0.07778) (0.10531) (0.59218) (0.15655) (0.22374) (0.74617) (0.27717) (0.93228)
−0.00084 * 0.00003 −0.0065 * −0.00450 *** 0.00235 −0.01328 *** −0.00436** −0.0033
Year (0.00042) (0.00057) (0.00322) (0.00085) *(0.00122) (0.00406) (0.00151) (0.00507)
0.71858 *** 0.739 *** 1.31021 *** 0.91076 *** 0.72633 *** 1.57892 *** 0.65774 *** −0.32858
tuition fee (0.02958) (0.04006) (0.22523) (0.05954) (0.08510) (0.28380) (0.10542) (0.35459)
government 0.01338 *** 0.02026 *** 0.01060 0.02347 * 0.07606 *** −0.07408 0.00344 −0.02347
subsidies (0.00506) (0.00685) (0.03851) (0.01018) (0.01455) (0.04852) (0.01802) (0.06062)
Note: * p < 0.1, ** p < 0.05, *** p < 0.01.

The results of polynomial regression for labor costs indicate that tuition fee proves negative,
whereas tuition fee square proves positive. This implies that labor costs will increase as the tuition
fees increase, but at an increasing rate. We found similar results in the operating expenses and
student support fee models. However, the negative tuition fee squared coefficient in research expenses,
expenditure from investments and other assets, and unused balance carried forward to the following
term models indicate that the effect of tuition fees diminishes as tuition fees increase. Government
subsidies provide different results compared to tuition fees. It is important to note that the research cost,
expenditure from investments and other assets, and unused balance carried forward to the following
term models show different signs between tuition fees and government subsidies.
Sustainability 2020, 12, 5066 14 of 19

Table 9. Results of the polynomial regression model.

Expenditure from Fixed Asset Unused Balance
Labor Operating Research Laboratory Student
Investments and Purchase Carried Forward to
Costs Expenses Expenses Fees Support Fees
Other Assets Expenses the Following Term
Estimate Estimate Estimate Estimate Estimate Estimate Estimate Estimate
(Std. Error) (Std. Error) (Std. Error) (Std. Error) (Std. Error) (Std. Error) (Std. Error) (Std. Error)
0.10932 ** −0.0755 0.90783 ** −0.36045 *** 0.35643 ** −0.33384 −0.31036 ** −0.18047
Size 2 (−0.03547) (−0.04949) (−0.28127) (−0.07475) (−0.10414) (−0.35398) (−0.1323) (−0.44232)
0.28677 *** −0.12888 * 0.74141 * −0.44008 *** 0.34773 ** −0.82654 * −0.24356 0.76844
Size 3 (−0.04893) (−0.06826) (−0.38799) (−0.10311) (−0.14366) (−0.4883) (−0.1825) (−0.61015)

Finance −0.02854 0.00312 −1.11739 ** −0.10065 0.38524 * −1.20538 * −0.84749 ** −3.52164 ***
size 2 (−0.06824) (−0.09521) (−0.54119) (−0.14382) (−0.20038) (−0.6811) (−0.25456) (−0.85106)

Finance 0.15811 ** 0.28038 ** −0.57538 0.50281 ** 0.6422 ** −0.49051 −0.08574 −1.62956 **

size 3 (−0.06394) (−0.08922) (−0.50708) (−0.13475) (−0.18776) (−0.63818) (−0.23852) (−0.79744)

Finance 0.55514 *** 0.35987 ** −0.03909 0.63863 *** 0.56775 ** 0.69299 −0.0439 −2.12168 **
size 4 (−0.07513) (−0.10482) (−0.59578) (−0.15833) (−0.2206) (−0.74981) (−0.28024) (−0.93692)

Finance 0.52856 *** 0.7445 *** −0.29402 0.4865 ** 0.62742 ** 0.75534 0.63401 ** 0.88397
size 5 (−0.07529) (−0.10504) (−0.59706) (−0.15866) (−0.22107) (−0.75142) (−0.28083) (−0.93893)
−0.00055 0.00029 −0.00848 ** −0.00442 *** 0.00305 ** −0.01638 *** −0.00472 ** −0.00705
Year (−0.00041) (−0.00058) (−0.00328) (−0.00087) (−0.00121) (−0.00413) (−0.00154) (−0.00516)
−2.79458 *** −2.26815 ** 12.46893 ** −0.2286 −7.1948 ** 21.48103 ** 2.23008 29.25179 **
tuition fee (−0.6576) (−0.91749) (−5.21486) (−1.38582) (−1.93091) (−6.56308) (−2.45289) (−8.20085)
tuition fee 0.09578 *** 0.08202 ** −0.31302 ** 0.03089 0.21609 *** −0.55498 ** −0.04482 −0.81707 **
square (−0.01818) (−0.02537) (−0.1442) (−0.03832) (−0.05339) (−0.18149) (−0.06783) (−0.22678)
government −0.07617 *** −0.05399 ** −0.2761 ** −0.01689 −0.11722 ** −0.37141 ** −0.08345 0.04165
subsidies (−0.01381) (−0.01927) (−0.10951) (−0.0291) (−0.04055) (−0.13782) (−0.05151) (−0.17221)
government 0.00556 *** 0.00461 *** 0.01864 ** 0.00252 0.01198 *** 0.01965 ** 0.00558 −0.00302
subsidies square (−0.00082) (−0.00115) (−0.00654) (−0.00174) (−0.00242) (−0.00823) (−0.00307) (−0.01028)

Note: * p < 0.1, ** p < 0.05, *** p < 0.01.

6. Discussion
Tuition fee increase has become an important issue in Korea since the early 2000s. Along with
public concerns about tuition fees, the government made efforts to address these problems with
the amendment of the Higher Education Act. Using data from the financial statements of private
universities, this study aimed to provide important insight into higher education policies while
examining the impact of the tuition fee policy on university financial management. This study briefly
examines the average tuition increase in percentage change by year. The findings revealed that
government tuition fee policies have been effective in controlling tuition fees after 2011. While the
tuition fee increase rate slowed down after 2011, government subsidies showed a critical increase
rate. The tuition fee control policy has major implications for universities in Korea because tuition is
the largest source of revenue for most universities, comprising 65% of their total revenue. With this
background, this study analyzed the effects of tuition fee control on university expenditures, such as
labor costs, operating expenses, research expenses, laboratory fees, and student support fees. The effect
of tuition fee control was examined using the LSDV model. The results indicate that universities
increase their spending in some items, such as labor costs, operating expenses, and student support fees,
while there is no difference in research expenses, laboratory fees, and expenditure from investments and
other assets. Based on the principal–agency theory, the findings regarding labor costs and operating
expenses are intuitive, but those pertaining to student support fee increases are not. These results can
be explained by considering government subsidies. As mentioned above, the Korean government has
increased their subsidies to enhance university capability in a competitive situation. Most government
subsidies include student capability enhancement projects, and these subsidies flow into universities
through the university matching the fund. In addition, government subsidies increased through
scholarships for students, and thus expenditure on students also increased. In this context, it is plausible
to understand that the increase in student support fees after 2011 arose from government subsidies.
However, there is no significant increase in research expenses, laboratory costs, and expenditure from
investments and other assets. In the case of fixed asset purchase expenses, we found that expenditure
decreased after 2011. These results prove the existence of a moral hazard in university expenditure
under financial constraints. The labor costs of faculty and staff are essential for education and research,
Sustainability 2020, 12, 5066 15 of 19

and increasing these costs does not necessarily mean that education and research were neglected. It is
natural for universities to use selective reinvestment because comprehensive coverage is considered
unviable for universities in a financial constraint situation. These differences may result from the
differences in universities’ priorities and organizations’ purposes. However, it is important to note the
universities’ behaviors and responses. When universities face financial constraints, it is said that some
initiatives, such as decreasing the number of full-time faculty members, decreased course and program
offerings, and reduced library and student services are undertaken in the name of cost reduction [7].
However, this study provides different results, namely that universities seek other methods to avoid
financial constraints. The results indicate that universities cut their spending in specific areas; however,
in certain areas, universities tended to pursue benefits such as labor and operating costs.
These findings added to our understanding about universities’ characteristics. One perspective
on universities’ characteristics considers the university as an academic community that shares the
same values and norms and makes consensual decisions [47]. Universities are operated as per the
norms and values of learning that are shared among not only the professors, but also other members of
the university [48]. Another perspective views universities as complex organizations with an official
hierarchy and a series of regulations. In these perspectives, all universities have official communication
channels and bureaucratic stages of authority [49]. However, universities have multiple members in
their organizational structures, such as the president, chairman, board of directors, professors, students,
and staff, and have complicated decision-making and execution processes that reflect their education
and research capabilities. In addition, as Liefner [30] notes, there are numerous principals and agents
in higher education institutions. Furthermore, we find that professors themselves have different goals
because they increase their labor cost while decreasing research expenditure. This study provides the
evidence that members of a university have different goals and preferences [45], and there may be
conflicts in their preferences and priorities.
In addition to the LSDV model, the polynomial regression model provides the result that
universities behave differently according to resources, whether they are tuition fees or government
subsidies. The labor costs, operating expenses, and student support fees show an increase as the tuition
fees increase with an increasing rate for both tuition fees and government subsidies. Research expenses
and expenditures from investments and other assets increase as tuition fees increase with a diminishing
rate. In contrast, research expenses and expenditure from investments and other assets increase as
government subsidies increase with an increasing rate. It is important to note that these results are
relevant to principal–agency theory. There is the relationship between the government as principal and
the university as agent [50]. Principal–agency theory can be used to understand motivations and the
impact of competing demands on the decision-making of universities [51]. Applying the principal and
agent model, this study provides the evidence that universities have different organizational interests
according to resources. In a situation where the introduction of tuition fee control policy could be
seen as a threat to universities [2], this study reveals the pattern that universities raise as much money
as they can and spend all the money from government subsidies: The so-called revenue theory of
cost [43]. However, with tuition fees, universities show different patterns in specific expenditures,
such as research expenses and expenditure from investments and other assets. This result provides the
evidence that the attempt to integrate the perspective of principal and agency theory into the sphere of
financial management between government and university is successful [51]. It is important to note
some of the key perceptions and insights that principal and agency theory could offer for university
financial management.
In this context, it is necessary to adapt the performance-based research funding system. In Korea,
the government employs a performance-based system in the area of university education, while there is
no systematic performance-based system for university research [52]. The performance-based funding
system reduces the risk of adverse selection and moral hazard problems. This system makes universities
more autonomous and increases productivity along with more strategic university management [53].
Sustainability 2020, 12, 5066 16 of 19

At the university level, it is necessary to rethink universities’ planning and management practices
from a general fund approach and centralized, incremental budgeting to an incentive-based budget
system or Responsibility Center Management [25]. Until now, most Korean universities have used
centralized and incremental budgeting. Given that goal conflicts and information asymmetries are
relevant in the university context, it is necessary to improve decision-making through better information
and an incentive mechanism. An incentive-based budget system provides better information for the
unit level to increase planning capacity [54]. In addition, an incentive-based system devolves budget
responsibility to academic units to create the incentive for academic units to generate revenues and
decrease costs [29].

7. Conclusions
The rapid growth of higher education tuition fees has led to greater interest in higher education
policy and scholarship. The Korean government amended the Higher Education Act to strengthen
control over tuition fee increase and set a limit on the increase, and it has also been implementing
policies to control tuition fee increase through various financial projects. In this situation, this study
investigated the effect of the tuition fee control policy and examined the characteristics of financial
management in universities under tuition fee constraints.
An analysis was conducted on the income and expenditure structure of university finance.
The results showed that the increase rate of tuition fees decreased after 2011, but that on government
subsidies increased significantly. Government policy to increase subsidies tends to be suppressing
tuition increase. In addition, this study further examined the characteristics of financial management
in universities using the principal–agent model. This study examined the effects of tuition fees
and government subsidies on dependent variables such as labor cost, operating expenses, and so on.
Using an LSDV model, this study investigated the effects of tuition fees on individual models. The LSDV
results indicate that universities increase labor costs, operating expenses, and student support fees.
Relating to student support fee increase, this study explains that this increases through government
subsidies and scholarships. In the case of research expenses, laboratory fees, and expenditure
from investment and other assets, we found no difference from 2006. Using polynomial regression,
this study found that universities tend to behave differently according to source, whether it is from
government or tuition. Applying the principal and agent theory, this study suggested the necessity of
a performance-based research system in research at government levels and an incentive-based budget
system in universities.
Despite such significance, this study has some limitations. While it analyzed the characteristics
of financial management under tuition fee constraints, it failed to examine the changes in financial
structure that may have been caused by tuition fee constraints. It is necessary to examine how financial
structures, such as financial stability, growth, and soundness, have changed due to tuition fee constraints.
Furthermore, while this study examined the characteristics of financial management under tuition
fee constraints, it did not review financial expenditure related to university performance. It is thus
necessary to review whether the increase or decrease of expenditure relates to university performance.

Author Contributions: Conceptualization, Y.-H.L.; methodology, Y.-H.L.; validation, Y.-H.L.; writing-original

draft preparation, Y.-H.L.; writing-review and editing, K.-S.K. and K.-H.L.; funding acquisition, K.-H.L. All authors
have read and agreed to the published version of the manuscript.
Funding: This research was supported by Kangwon National University.
Conflicts of Interest: The authors declare no conflicts of interest.
Sustainability 2020, 12, 5066 17 of 19

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