Rajat Kathuria: Trust the market

Browsing through the website of the All India Council for Technical Education (AICTE), one discovers over 1,000 institutions providing post-graduate diplomas in management approved by the regulator across the country.

Notable among the institutions not listed as approved on the AICTE website are the four Indian Institutes of Management (IIMs), namely Lucknow, Kohzikode, Indore and Bangalore. Nobody doubts the quality of post-graduate management education being provided by the IIMs and nobody will be convinced of the quality of education supplied by some of the institutions listed as approved by the AICTE.

Regulation is a relatively new field in India and perhaps "independent" regulation even newer. One must recognise that regulation itself is an imperfection that exists to cure market failure. Market failure may exist due to a number of reasons such as monopoly, asymmetric information and so on.

Potential students appear to face serious difficulties in gathering and evaluating information about the array of qualifications available from tertiary institutions and in judging how they compare internationally. Does this call for well-formulated regulation to provide assurance of quality? Maybe, but that need not be the only solution.

First, information is costly to provide and to seek; producers, therefore, face a rational incentive to provide, and potential consumers to seek, only as much information as suits their purposes. If those incentives are absent, it is just as likely that too much information will be produced as too little.

Second, other voluntary mechanisms have developed to meet the demand for information, such as advertising, business school surveys (notwithstanding their flaws), quality of placement activity and so on that attest to quality; and successful schools earn invaluable reputations that spread by word of mouth.

Third, "comparison shopping" by potential students and their choices will benefit other less well-informed consumers. All of these mechanisms seem to be at work in the market for post-graduate management education. It is, therefore, far from self-evident that government approval and accreditation of management institutions are necessarily the only tools available to signal quality and address the problem of asymmetric information in these markets.

The deeper problem here is that "quality" is a highly subjective concept, perhaps impossible to capture in any simple, unambiguous definition. The recent step taken by AICTE to impose mandatory disclosure norms on all management institutes is a welcome one, regulatory approval is contingent on satisfying these criteria.

But it's not clear what happens to institutions that do not fulfill these norms. A school concerned about losing its approval would naturally be induced to comply. On the other hand, if a schools reputation is built independently of AICTE approval, and the market accepts its quality, should we really be concerned? Indian School of Business (ISB), Hyderabad is a conspicuous example.

It is simply not plausible to argue that a single agency, the AICTE can do a better overall job of replicating and processing this sort of information than the market. But if the system were deregulated, the AICTE could survive on a voluntary basis if its services were valued and tertiary institutions found them to be a useful way of signalling their standards and reputation. The result would be a much more diverse and manageable system.

The author is professor of economics at IMI and consultant Trai