The U.S. Market for Higher Education: A General Equilibrium Analysis of State and Private Colleges and Public Funding Policies

44 Pages Posted: 10 Aug 2013  

Dennis Epple

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

Sinan Sarpca

Koc University - Department of Economics

Holger Sieg

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: August 2013

Abstract

We develop a general equilibrium model of the market for undergraduate higher education that captures the coexistence of public and private colleges, the large degree of quality differentiation among them, and the tuition and admission policies that emerge from their competition for students. The calibrated version of the model matches well the aggregate characteristics of U.S. higher education including college attendance in public and private schools, tuition levels, and the distribution of federal aid. Predictions about the distribution of students across colleges by ability and income and about the provision of institutional aid are realistic. We use the model to examine the consequences of federal and state aid policies. A one-third increase in the availability of federal aid increases college attendance by 6% of the initial college population, virtually all of the increase being in state colleges and mainly of poor students. Private colleges reduce institutional aid and use the net funding gain to spend more on educational inputs and to substitute some highly able poor students for less able rich students. Reductions in federal or state aid result in reduced attendance mainly by poor students. Reductions of support to state colleges does not cause private colleges to grow but does improve their quality as demand shifts toward them.

Suggested Citation

Epple, Dennis and Romano, Richard E. and Sarpca, Sinan and Sieg, Holger, The U.S. Market for Higher Education: A General Equilibrium Analysis of State and Private Colleges and Public Funding Policies (August 2013). NBER Working Paper No. w19298. Available at SSRN: https://ssrn.com/abstract=2308267

Dennis Epple (Contact Author)

Carnegie Mellon University ( email )

Tepper School of Business
Pittsburgh, PA 15213-3890
United States
412-268-1536 (Phone)
412-268-7357 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Richard E. Romano

University of Florida - Warrington College of Business Administration - Department of Economics ( email )

Gainesville, FL 32611-7140
United States
(352) 392-4812 (Phone)

HOME PAGE: http://www.cba.ufl.edu/faculty/facultyinfo.asp?WEBID=321

Sinan Sarpca

Koc University - Department of Economics ( email )

Rumeli Feneri Yolu
Sariyer 80910, Istanbul
Turkey
+90 (212) 338 1214 (Phone)

HOME PAGE: http://network.ku.edu.tr/~ssarpca/

Holger Sieg

University of Pennsylvania - Department of Economics ( email )

160 McNeil Building
3718 Locust Walk
Philadelphia, PA 19104
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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