Peer Effects, Financial Aid, and Selection of Students into Colleges and Universities: An Empirical Analysis

Duke University Economics Working Paper No. 00-02

41 Pages Posted: 10 Jul 2000

See all articles by Dennis Epple

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

Holger Sieg

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

Date Written: 2000

Abstract

The goal of this paper is to develop predictions regarding market consequences of peer effects in higher education and to offer empirical evidence about the extent to which those predictions are borne out in the data. We develop a model in which colleges seek to maximize the quality of the educational experience provided to their students. From this model we deduce predictions about the hierarchy of schools that emerges in equilibrium, the allocation of students by income and ability among schools, and about the pricing policies that schools adopt. In the empirical analysis, we use both university-level data provided primarily by Petersons and student-level data from the National Postsecondary Student Aid Study obtained from the NCES. The findings of this paper suggest that there is a hierarchy of school qualities which is characterized by substantial stratification by income and ability. The evidence on pricing by ability is supportive of positive peer effects in educational achievement from high ability at the college level. However, the evidence on pricing also suggests that more highly ranked schools exercise some degree of market power. This is reflected in the substantial variation of price with income coupled with discounts to more able students that are modest at best.

JEL Classification: I21, J24

Suggested Citation

Epple, Dennis and Romano, Richard E. and Sieg, Holger, Peer Effects, Financial Aid, and Selection of Students into Colleges and Universities: An Empirical Analysis (2000). Duke University Economics Working Paper No. 00-02. Available at SSRN: https://ssrn.com/abstract=235740 or http://dx.doi.org/10.2139/ssrn.235740

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)

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

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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

Holger Sieg

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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