The Cost of Crafting a Class: (In)Efficient Financial Aid Allocation at Two Private Colleges

CHERI Working Paper No. 102

35 Pages Posted: 10 May 2007

See all articles by Robert E. Martin

Robert E. Martin

Centre College

Randy Campbell

Mississippi State University - College of Business

Michael J. Rizzo

American Institute for Economic Research

Date Written: May 15, 2007

Abstract

In order to meet two key objectives, enrollment managers at colleges and universities make extensive use of single equation probability models. The first objective is to generate sufficient financial resources to educate the students enrolled. The more dependent the institution is on tuition revenues, the more important is this objective. The second objective is to distribute and monitor student subsidies according to need, merit, and the institution's diversity goals. This paper reviews the existing theoretical literature on the allocation of financial aid and proposes a more complete method of analyzing the matriculation process. Using proprietary data from two representative small colleges, we demonstrate that single equation estimates of enrollment probabilities can suffer from an endogeneity bias. We propose a simultaneous probit-tobit system that corrects for this bias. Our two major findings are: (1) contrary to the predictions of the theoretical model, institutions of higher education make larger financial aid awards to students with high enrollment propensities and (2) traditional single equation models therefore systematically overstate the true impact of financial aid on enrollment probabilities.

Keywords: Enrollment, Financial Aid, Agency Problem, Simultaneous Probit-Tobit

JEL Classification: D49, D80, I21, I22, L10, L30

Suggested Citation

Martin, Robert E. and Campbell, Randy and Rizzo, Michael J., The Cost of Crafting a Class: (In)Efficient Financial Aid Allocation at Two Private Colleges (May 15, 2007). CHERI Working Paper No. 102, Available at SSRN: https://ssrn.com/abstract=985117 or http://dx.doi.org/10.2139/ssrn.985117

Robert E. Martin

Centre College ( email )

600 West Walnut Street
Danville, KY 40422
United States

Randy Campbell

Mississippi State University - College of Business ( email )

312 McCool Hall
Box 9580
Mississippi State, MS 39762-0964
United States
662-325-2341 (Phone)
662-325-1987 (Fax)

Michael J. Rizzo (Contact Author)

American Institute for Economic Research ( email )

PO Box 1000
Great Barrington, MA 01230
United States

HOME PAGE: http://www.aier.org

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