Product market competition and financial constraints: Evidence from higher education

Abstract

This paper empirically investigates the relationship between product market competition and financial constraint of traditional US private colleges and universities. Using data for private, not-for-profit colleges and universities from 2006-2018, we create a synthetic credit rating using the Moody's Rating Methodology for Higher Education and generate market concentration measurements using enrollment data, geographic location, and incoming student SAT scores or acceptance rates. We find that higher market concentration is associated with greater financial constraint, schools with lowscoring incoming students are more constrained when facing competition from peers with low-scoring incoming students, and schools in markets with growing student populations have more financial constraint on average in less-competitive markets and less financial constraint in more-competitive markets.

Keywords: Financial constraint, higher education finance, product market competition