By Bryan Caplan
While in the 1970s it was difficult for less prestigious universities to compete on an equal footing with top institutions, which were able to offer to new recruits the positive externality associated with productive colleagues, this is not true anymore. Delocalization of production externalities renders faculty more mobile, making it easier for a new place to attract away the most talented researchers with higher salary. And this is the second important effect. When this externality was localized, universities could more easily appropriate the rents. Today, with the universal access to knowledge, faculty should be able to capture more of the benefits from the externalities. We find evidence consistent with this prediction in the average salaries at different institutions: Between the 1970s and the 1990s, faculty salaries have increased the most at universities where the estimated externality drops the most.
At GMU, the positive externality of quality and quantity of colleagues has grown for me every year, and yet my salary has continued to rise. Are we just an outlier?
P.S. See Mankiw for more on this paper.