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

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  • Epple, Dennis
  • Romano, Richard
  • Sieg, Holger

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.

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Bibliographic Info

Paper provided by Duke University, Department of Economics in its series Working Papers with number 00-02.

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Date of creation: 2000
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Handle: RePEc:duk:dukeec:00-02

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  1. Caroline M. Hoxby, 2000. "Benevolent Colluders? The Effects of Antitrust Action on College Financial Aid and Tuition," NBER Working Papers 7754, National Bureau of Economic Research, Inc.
  2. Dennis W. Carlton & Gustavo E. Bamberger & Roy J. Epstein, 1995. "Antitrust and Higher Education: Was There a Conspiracy to Restrict Financial Aid?," NBER Working Papers 4998, National Bureau of Economic Research, Inc.
  3. Epple, Dennis & Romano, Richard E, 1998. "Competition between Private and Public Schools, Vouchers, and Peer-Group Effects," American Economic Review, American Economic Association, vol. 88(1), pages 33-62, March.
  4. Caroline M. Hoxby, 1997. "How the Changing Market Structure of U.S. Higher Education Explains College Tuition," NBER Working Papers 6323, National Bureau of Economic Research, Inc.
  5. Arnott, Richard & Rowse, John, 1987. "Peer group effects and educational attainment," Journal of Public Economics, Elsevier, vol. 32(3), pages 287-305, April.
  6. Rothschild, Michael & White, Lawrence J, 1995. "The Analytics of the Pricing of Higher Education and Other Services in Which the Customers Are Inputs," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 573-86, June.
  7. Janet S. Netz, 1998. "Non-Profits and Price-Fixing: The Case of the Ivy League," Industrial Organization 9808001, EconWPA.
  8. Thomas J. Nechyba, 2001. "Centralization, Fiscal Federalism and Private School Attendance," NBER Working Papers 8355, National Bureau of Economic Research, Inc.
  9. Dennis Epple & Richard Romano, 2000. "Neighborhood Schools, Choice, and the Distribution of Educational Benefits," NBER Working Papers 7850, National Bureau of Economic Research, Inc.
  10. Elizabeth M. Caucutt, 2002. "Educational Vouchers When There Are Peer Group Effects--Size Matters," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 195-222, February.
  11. Winship C. Fuller & Charles F. Manski & David A. Wise, 1982. "New Evidence on the Economic Determinants of Postsecondary Schooling Choices," Journal of Human Resources, University of Wisconsin Press, vol. 17(4), pages 477-498.
  12. C. F. Manski, . "Educational choice (vouchers) and social mobility," Institute for Research on Poverty Discussion Papers 972-92, University of Wisconsin Institute for Research on Poverty.
  13. Venti, Steven F. & Wise, David A., 1982. "Test scores, educational opportunities, and individual choice," Journal of Public Economics, Elsevier, vol. 18(1), pages 35-63, June.
  14. Toma, Eugenia Froedge, 1996. "Public Funding and Private Schooling across Countries," Journal of Law and Economics, University of Chicago Press, vol. 39(1), pages 121-48, April.
  15. Bergstrom, Theodore C & Rubinfeld, Daniel L & Shapiro, Perry, 1982. "Micro-Based Estimates of Demand Functions for Local School Expenditures," Econometrica, Econometric Society, vol. 50(5), pages 1183-1205, September.
  16. Robert P. Gilles and Suzanne Scotchmer., 1995. "Decentralization in Replicated Club Economies with Multiple Private Goods," Economics Working Papers 95-243, University of California at Berkeley.
  17. repec:fth:prinin:409 is not listed on IDEAS
  18. Thomas J. Nechyba, 2000. "Mobility, Targeting, and Private-School Vouchers," American Economic Review, American Economic Association, vol. 90(1), pages 130-146, March.
  19. Fernandez, Raquel & Rogerson, Richard, 1998. "Public Education and Income Distribution: A Dynamic Quantitative Evaluation of Education-Finance Reform," American Economic Review, American Economic Association, vol. 88(4), pages 813-33, September.
  20. Glomm, Gerhard & Ravikumar, B, 1992. "Public versus Private Investment in Human Capital Endogenous Growth and Income Inequality," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 818-34, August.
  21. Caroline Minter Hoxby, 1996. "Are Efficiency and Equity in School Finance Substitutes or Complements?," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 51-72, Fall.
  22. Fernandez, Raquel & Rogerson, Richard, 1996. "Income Distribution, Communities, and the Quality of Public Education," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 135-64, February.
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