Wednesday, September 30, 2009

Refunding textbook royalties

Ian Ayres wrote an article at the Freakonomics blog about how he refunds his textbook royalties to his students. Here's his chosen excerpt of a 2005 op-ed he wrote on the same subject:
[A]t the moment, professors’ incentives in choosing textbooks are in some ways more distorted than doctors’ incentives in choosing drugs. You see, I earn a $10.30 royalty on every copy of my textbook that a student buys. Instead of just trying to get the best book for my class (and to do so I should weigh both quality and price), I might also consider assigning my own book and increasing my profit.

This is a self-dealing transaction, which would be presumptively illegal if professors owed a fiduciary duty to students. Some professors realize this and donate to charity the royalties they earn when they assign students their own books.

So this year, I am going to do something different. I will give $11 to each of my contracts students who buys my book. That way, we will all know that I assigned the book for the right reason.

In his blog post, Ayres encourages students to ask their professors for a refund of royalties if they assign their own textbook. Upon reading that suggestion, I knew that some students would take Ayres up on that proposition. I immediately wondered how other professors would take the suggestion that they should refund their royalties.

Lucky for me, I didn't have to wait long to find out.

Just last week, Daniel Hamermesh wrote an article at Freakonomics on why he doesn't pay out royalties. In it, he discusses the role of transactions costs. On Ayres' article, Hamermesh says:

This has caused me trouble: one of my students read it and asked why I don’t do that as well for my little book, Economics Is Everywhere. I have done this before, when I assigned my labor economics text to a class of 35 students, but not in her class.

The reason I don’t now, I told her, is transactions costs. With 550 freshmen, there is no way to determine which students have bought the book or to hand out the money efficiently. Instead, I make a donation to the university about equal to the royalties earned from my class. My guilt is assuaged and my very scarce lecture time is not disrupted. But if the transactions costs (and my class) were smaller, giving the money back to the students would be a Pareto improvement: the students would be better off.


That's one perspective, but I have a different reason to be skeptical of Ayres' point: it tackles the wrong problem. The chief problem with textbooks is not that professors exploit a captive audience by writing subpar textbooks and then assigning them for massive profits. It is that professors are not sensitive to the full price that students pay for their textbooks.

I discuss this point elsewhere (here and here). Textbooks are expensive mainly because of the review/marketing/beautification process. Professors are insulated from costs of textbooks, and textbook companies want it that way.

In fact, textbook companies offer attractive incentives for professors to adopt a particular textbook. In a hybrid of marketing and review, they pay professors to review things like the table of contents and the preface (never the entire book). Afterwards, professors are asked if they would consider adopting the textbook for their own class, among other questions.

Moreover, textbook companies send professors piles of trial copies of textbooks. In my one year as an adjunct professor, I received more than 10 trial copies of textbooks. I didn't read them. The books just collected dust in my office until a second-hand bookseller knocked on my door, and bought them at a deep discount.

If only one year fetched me 10 textbooks, I imagine that Ayres has a similar second-hand market available to him. If so, shouldn't he refund a share of those profits to his students? Similar marketing efforts contribute to the cost of his own textbook. And, that's a significant fraction of his textbook price.

For example, Ayres' textbook costs $159.00 at retail price (currently on sale for $133.56 at Amazon). Ayres is happy to forgo his $11 share of that final price. Notice that even if the book has a production cost of $30, the middlemen more than triple the final cost of the textbook (from $41 to $133.56).

In short, I'm not impressed by Ayres' gesture to refund his royalty. That's because there are better options for his students.

If I were a student of his, I would be much happier if he took a $15 royalty, and used the extra compensation to pursue less expensive publishing options. On another note, I'd be much more impressed if Ayres presented me with a free (or very inexpensive) set of notes specifically tailored to the class. In addition to this, he could recommend his book as an optional reference, or perhaps, recommend his top three favorites.

I like Ayres' purported concern for his students' pocketbooks, but I would like to make his concluding point stronger. He concluded:

A small way to make professors more sensitive about the price of the books they are assigning is to think about the royalties they are generating for themselves.
Here's how I would change it:

A big way to make professors more sensitive about the price of books they are assigning is to try self-publishing. It's not that hard, your royalty can go up, and you can offer your book at a lower price... to your students and the world.

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