Amazon put Borders out of business.  Is online education going to do to the same to brick-and-mortar colleges?*  Reflecting on earlier conversations with Arnold, I’ve realized that there are three competing perspectives with three competing predictions.

Perspective #1: Human capital model. 

Analysis: The point of college is to teach marketable skills.  Online education will soon be able to teach marketable skills as effectively as brick-and-mortar schools at a tiny fraction of the cost.

Prediction: Online education will soon have roughly the same wage premium as brick-and-mortar colleges, and rapidly drive these high-cost dinosaurs into bankruptcy.

Perspective #2: Status good model. 

Analysis: Online education will soon be a great way to teach marketable skills.  But colleges are primarily places where young elites (and their tuition-paying parents!) bond.  In Arnold’s words:

[G]oing to a top college today is like belonging to the right church in 1850 or the right country club in 1950. When you are supplying a status good, ostentatiously wasting money on buildings can increase demand.

Prediction: Brick-and-mortar colleges are here to stay.  However, online education will easily compete for the segment of students who only want to acquire marketable skills.  Students who opt for online education will earn a wage premium comparable to that of brick-and-mortar grads.

Perspective #3: Signaling model.

Analysis: Brick-and-mortar colleges are primarily places where students signal a combination of intelligence, conscientiousness, and conformity.  Online education suffers from a severe adverse selection problem, because the students most eager to avoid traditional education tend to be deficient in one or more of these traits – especially conformity to the established social norm that young people should go to a traditional college.

Prediction: Brick-and-mortar colleges are here to stay.  Online education may be a niche good, but the labor market will usually penalize its graduates with a low wage premium.

Summary table:


Fate of Brick & Mortar Colleges

Wage Premium for Online Grads










I hasten to add that these are three polar cases; I’m happy to admit that each is partly true.  The real question is the weight each perspective deserves.  My rough guess is 20% for human capital, 10% for status good (though more at elite colleges), and 70% signaling.  I encourage critics to provide alternate breakdowns.

My implied prediction: brick-and-mortar colleges will probably experience a slight decline in coming years, and the wage premium for online grads will probably slightly rise.  In the absence of big changes in government policy, however, higher education isn’t going to change much.  Old-fashioned colleges will stay in business, and the labor market will continue to heavily favor their graduates.

As always, I’m open to relevant bets.

* When I talk about “online education,” I don’t just mean students at existing brick-and-mortar colleges taking some classes from their dorm rooms.  I mean students enrolling in virtual colleges instead of physical colleges.