60 Minutes had a nice piece on college football on Sunday with correspondent Armen Keteyian (Link). The story examined the popularity and skyrocketing costs of college football programs. The most interesting part of the story was its application of game theory. To stay competitive, a team must recruit a good coach and the best players. Of course, a team’s competitors are going to be doing the same. This leads to a type of Prisoner’s Dilemma where a team can choose to “keep costs down” or “escalate.” If the team keeps costs down and their opponents escalate, they have a terrible record, their alums are not happy, and their alums are not generous with donations. This leads to a college football arms race:
[Michigan athletic director] Dave Brandon: You’ve got 125 of these programs. Out of 125, 22 of them were cash flow even or cash flow positive. Now, thankfully, we’re one of those. What that means is you’ve got a model that’s not sustainable in most cases. You just don’t have enough revenues to support the costs. And the costs continue to go up.
Why? A big reason is universities are in the midst of a sports building binge. Cal Berkeley, for example, renovated its stadium to the tune of $321 million. The list is endless. Michigan’s athletic department floated $226 million in bonds to upgrade the Big House.
[60 Minutes correspondent] Armen Keteyian: What are you chasing?
Dave Brandon: We want to win championships.
Armen Keteyian: And you’re going to get a big payout?
Dave Brandon: We’re going to have excited fans, we’re going to fill stadiums, we’re going to be on TV. We’re going to accomplish all of the goals that we need to accomplish to keep this department moving ahead.
Armen Keteyian: And that’s where the phrase “arms race” comes up?
Dave Brandon: If you don’t keep pace, if you don’t stay competitive, you’re going to have a problem.
Inside a recently built indoor practice facility that many an NFL team would envy, we spoke to Michigan’s head coach Brady Hoke.
Armen Keteyian: Can you recruit a top player without facilities like this?
[Michigan’s head coach] Brady Hoke: You know, it matters. I– I’d be sitting here lying if I didn’t think it mattered. I think the other part of it though– the people have to matter too.
The program every school has been chasing is Alabama. The Crimson Tide have rolled to two national titles in the last three years. The architect of that success is Nick Saban, as innovative a coach as there is in the game. And the leader of another escalating trend in college football: skyrocketing coaching salaries. Saban is paid over $5 million a year, more than Alabama’s chancellor.
Armen Keteyian: Are you worth it?
Nick Saban: Probably not. Probably not.
Universities engage in other arms races. The move toward the university as Club Med is an example. The university with the best dorms and exercise facilities recruit the best scholars. A university without an artificial rock climbing wall, water slides, and spa (sadly) cannot hope to be competitive.
Is there a way universities can deescalate?
Punk Rock Operations Research 
November 19th, 2012 at 5:45 pm
I think some schools (most Ivies, Stanford, Cal Tech, …) can compete on academic reputation and alumni networking prospects, even without the spas etc. (Princeton recently built some spiffy new dorms, but there’s no reason to build cinder-block warehouses when you have the dough for something nicer.)
Regarding salaries for football coaches, you might be amused by the section ” YOUR MOVE, AGGIES” at http://sportsillustrated.cnn.com/vault/article/magazine/MAG1126053/index.htm.
November 20th, 2012 at 5:53 pm
This “escalation” problem is very interesting and difficult to stop. I think the hope is that little luxuries can help sway students who are on the fence between universities A and B. It’s easier and faster to improve your facilities than it is to improve your reputation. Hopefully, after big investments in facilities, good recruiting will follow that will increase the university’s reputation down the road, but there are no guarantees of course. Another good use of money is to buy away star professors from other universities (like in the article Paul pointed to). There must be a sweet spot in the middle between these two kinds of expenses. BTW, my university is almost finished with the construction of a drop-dead-gorgeous-and-very-large new student center 🙂 I must admit it looks amazing.
November 20th, 2012 at 6:18 pm
Buying scholars, as Tallys mentions, may not be a better deal for debt-ridden students than buying sports teams is. A lot of top-reputation scholars are sheltered from teaching (or at least from teaching courses accessible to a large number of students, such as introductory lectures), a fact that may cause section sizes to rise or force more use of adjuncts and teaching assistants (not necessarily bad, but not what parents think they’re paying for) to cover the load. When it comes to academic bragging rights v. athletic bragging rights, I’m pretty sure most students favor the latter.