The U.S. Market for Higher Education: A General Equilibrium Analysis of State and Private Colleges and Public Funding Policies
Carnegie Mellon University; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)
Richard E. Romano
University of Florida - Warrington College of Business Administration - Department of Economics
Koc University - Department of Economics
University of Pennsylvania - Department of Economics
NBER Working Paper No. w19298
We develop a new general equilibrium model of the market for higher education that captures the coexistence of public and private universities, the large degree of quality differentiation among them, and the tuition and admission policies that emerge from their competition for students. We use the model to examine the consequences of federal and state aid policies. We show that private colleges game the federal financial aid system, strategically increasing tuition to increase student aid, and using the proceeds to spend more on educational resources and to compete for high-ability students. Increases in federal aid have modest effects in increasing college attendance, with nearly half of the increased federal aid offset by reduced institutional aid and increased university educational expenditures. A reduction in state subsidies coupled with increases in tuition at public schools substantially reduces attendance at those universities, with mainly poor students exiting, and with only moderate switching into private colleges.
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Number of Pages in PDF File: 42working papers series
Date posted: August 10, 2013
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