Why the US currently has the best research universities: Incentives, resources, and virtuous circles

W. Bentley MacLeod, Miguel Urquiola 22 February 2021



For many researchers around the world, landing a position at a leading American university is a coveted outcome. Schools like Berkeley and Stanford not only pay well – they furnish excellent facilities and above all strong colleagues. This allows the US to attract talented PhD students and professors from countries like China, France, Norway, and India (Cole 2009, Clotfelter 2010). 

If one turns back the clock 120-150 years, one finds something starkly different.  At the time, many American academics coveted positions abroad, particularly at European universities.  To illustrate this, one can analyse the universities Nobel prize winners were students or professors at – the idea being that schools that train or host such people tend to be productive at research. Such data show that the US was at the back of the pack circa say 1870, and is the clear leader today.

When and why did US research universities take the lead?  This question is relevant to issues from innovation policy to economic growth (Helmers and Rogers 2010, Valero and Van Reenen 2016).

Many observers cite events surrounding WWII as producing the turning point – for example, they highlight the migration of Jewish academics from Germany to the US, and the rise of federal research funding (Graham and Diamond 1997, Gruber and Johnson 2019). The emphasis on WWII is surely warranted – it highlights factors that strengthened American universities and weakened an erstwhile leader, Germany.

However, the Nobel data cited indicate that US universities had matched or surpassed those of most countries well before WWII. By this measure, they were ahead of all but Germany’s universities by 1910, and ahead of the universities of all countries by 1920. To cite one illustration of this timing, in 1901 Theodore Richard – who went on to win a Nobel Prize in Chemistry – became the first American-trained professor to be offered a position at a German university. In short, a successful explanation of American universities’ research dominance must begin in the late 1800s, and likely must involve factors other than mid-20th century events in Europe.

The explanation we offer highlights reforms that began after the Civil War and enhanced the incentives and resources the American university system directs at research.  In emphasising earlier events, our approach is closer to Veysey (1965) and Goldin and Katz (1999), and draws on Urquiola (2020) and MacLeod and Urquiola (2021).

Two observations are key to understanding these reforms. First, the US takes a relatively free-market approach to higher education; for instance, it allows easy entry by schools seeking to satisfy customer demand. Second, universities do not supply their customers with a single ‘product’; they provide a complex set of services among which is sorting. When a school produces sorting, it ‘sells’ peer groups – i.e. a chance to be exposed to and associated with certain types of people. For example, some schools cater to students who are smart, or wealthy, or artistic.

Since colonial times and into the 1800s, American households demanded denominational sorting. For example, Presbyterians wished to attend college with Presbyterians, Episcopalians with Episcopalians, Baptists with Baptists, and so on. Further, most preferred colleges close to home. All this produced massive entry – while in 1776 the US had nine colleges, another 900 opened before the Civil War. 

Mass entry meant that the early colleges tended to be small and underfunded. They offered a basic, narrow, and rigid curriculum delivered by unspecialised, often poorly paid professors. Colleges routinely hired faculty using criteria other than expertise, and provided them with few incentives or resources to do research.

Meanwhile, the situation in Europe was quite different.  Since about the Protestant Reformation, European states – particularly on the continent – had tended to tightly manage and eventually generously fund their universities. Faculty were often well-paid civil servants, assigned by ministries of education to specialised ‘chaired’ professorships (Paulsen 1906).  These schools gradually began to absorb and dominate the research activity previously located in academies (e.g. the Académie Royale, the Royal Society, and the Berlin Academy).  It is not surprising that, on average, the American colleges could hardly compete.

To understand how reforms allowed the US system to begin providing incentives and resources, it is useful to recognise that even if an institution is committed to research, producing it benefits from reasonably precise research performance measures. Precision is enhanced by academic specialisation – in this case, by organising professors into disciplines. How did American schools gain an interest in research and increase specialisation? 

During the last few decades of the 1800s, US colleges saw a gap grow between the skills they taught and those their customers demanded. With industrialisation, interest grew around areas that the college curricula essentially ignored, like engineering and business. In the 1870s and 1880s, new universities like Cornell and Johns Hopkins showed that one could attract students by offering specialised and advanced instruction in a range of areas, rather than by supplying denominational sorting. Incumbents like Harvard and Columbia responded forcefully, forming specialised arts and sciences departments and creating professional schools. 

Free entry allowed other schools to join the fray. This was helped by private donations, which propelled universities like Chicago and Stanford. It was also aided by public resources, which were crucial for entrants like Berkeley and MIT.

All these schools began to seek professors who were specialists and, therefore, researchers at the frontier of a field.  The academic system responded by providing tools to measure research output, like specialised journals. Schools thus gained the ability to identify, bid for, and recruit successful researchers. 

These years also saw some American universities acquire tremendous amounts of resources. In the early 1900s, the schools implementing reforms sought and achieved rapid enrolment growth. However, they found that this threatened the match between the sorting they provided and that key students demanded.  In particular, enrolment growth brought in lower-income students and Jewish students and – in a period of rising antisemitism – alienated the Protestant elites the colleges had traditionally served. By the early 1920s Columbia implemented selective admissions, with several schools following soon after. Selectivity set in motion another sorting process, concentrating high-ability/income students – and eventually high tuitions and donations – at such schools. This bolstered their ability to recruit desirable professors.

In addition, the early 1900s saw the emergence of ‘lumpy’ rewards for research, the most salient being tenure. Agency theory implies that an up-or-out incentive system can promote performance, particularly if professors compete against individuals of similar ability. In concert with increasingly precise research performance measures, tenure furthered a sorting process that led to professors clustering in departments with colleagues of similar ability.

In short, top US schools came to enjoy a virtuous circle that gave them resources to invest in research, which they could now effectively incentivise. This helped attract strong students and funding, which could go into further reforms and enhancements. At the same time, other schools struggled and lost ground, creating the between-school inequality evident in the US

Finally, throughout this period, such dynamics operated much more weakly in Europe, particularly on the continent. European states did not allow easy entry. This prevented the emergence of hundreds of struggling schools but also slowed the rise of extremely well-heeled magnets for global talent, like MIT or Stanford. Overall, sorting of all types was not as extensive in Europe. Concerning incentives, European professorial arrangements – whose origins lie in the High Middle Ages – use up-or-out schemes like tenure to a much lesser extent.

In short, our story is not one of success by design, but the consequence of competition and the confluence of a number of incentive mechanism that together help explain current performance. Finally, the world is not static. In the last 20 years the UK and the EU have created programmes to measure university quality and increase competition. It will be interesting to see how competition for faculty evolves in the global workplace. Will the more top-down management style in Europe out-compete the more free-wheeling American approach?


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Urquiola, M (2020), Markets, Minds, and Money: Why America Leads the World in University Research, Harvard University Press.

Valero, A and J Van Reenen (2016), “How Universities Boost Economic Growth”, VoxEU.org, 10 November.  

Veysey, L R (1965), The Emergence of the American University, The University of Chicago Press.



Topics:  Economic history Education Frontiers of economic research

Tags:  US universities, elite universities, tenure

Sami Mnaymneh Professor of Economics and Professor of International and Public Affairs, Columbia University

Professor and Chair, Department of Economics, Columbia University

CEPR Policy Research