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The incentive effects of higher education subsidies on student effort

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  • Aysegül Sahin

Abstract

This paper uses a game-theoretic model to analyze the disincentive effects of low-tuition policies on student effort. The model of parent and student responses to tuition subsidies is then calibrated using information from the National Longitudinal Survey of Youth 1979 and the High School and Beyond Sophomore Cohort: 1980-92. I find that although subsidizing tuition increases enrollment rates, it reduces student effort. This follows from the fact that a high-subsidy, low-tuition policy causes an increase in the percentage of less able and less highly motivated college graduates. Additionally-and potentially more important-all students, even the more highly motivated ones, respond to lower tuition levels by decreasing their effort levels. This study adds to the literature on the enrollment effects of low-tuition policies by demonstrating how high-subsidy, low-tuition policies have both disincentive effects on students' study time and adverse effects on human capital accumulation.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 192.

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Date of creation: 2004
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Handle: RePEc:fip:fednsr:192

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Keywords: College costs ; Universities and colleges ; Education ; Consumer behavior;

References

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  1. Richard Sabot & John Wakeman-Linn, 1991. "Grade Inflation and Course Choice," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 159-170, Winter.
  2. Becker, Gary S & Tomes, Nigel, 1979. "An Equilibrium Theory of the Distribution of Income and Intergenerational Mobility," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1153-89, December.
  3. Ernesto Villanueva, 2002. "Parental altruism under imperfect information: Theory and evidence," Economics Working Papers 650, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Pollak, Robert A, 1988. "Tied Transfers and Paternalistic Preferences," American Economic Review, American Economic Association, vol. 78(2), pages 240-44, May.
  5. Gary S. Becker & Nigel Tomes, 1976. "Child Endowments, and the Quantity and Quality of Children," NBER Working Papers 0123, National Bureau of Economic Research, Inc.
  6. Gary S. Becker, 1974. "A Theory of Social Interactions," NBER Working Papers 0042, National Bureau of Economic Research, Inc.
  7. Peter J. Klenow & Mark Bils, 2000. "Does Schooling Cause Growth?," American Economic Review, American Economic Association, vol. 90(5), pages 1160-1183, December.
  8. Murphy, Kevin M & Welch, Finis, 1992. "The Structure of Wages," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 285-326, February.
  9. Heckman, James J. & Lochner, Lance & Todd, Petra E., 2003. "Fifty Years of Mincer Earnings Regressions," IZA Discussion Papers 775, Institute for the Study of Labor (IZA).
  10. Elizabeth M. Caucutt & Krishna B. Kumar, 2000. "Higher Education Subsidies and Heterogeneity, A Dynamic Analysis," RCER Working Papers 472, University of Rochester - Center for Economic Research (RCER).
  11. Epple, Dennis & Romano, Richard & Sieg, Holger, 2000. "Peer Effects, Financial Aid, and Selection of Students into Colleges and Universities: An Empirical Analysis," Working Papers 00-02, Duke University, Department of Economics.
  12. Camera, G. & Blankenau, W., 2001. "Productive Education or a Marketable Degree?," Purdue University Economics Working Papers 1145, Purdue University, Department of Economics.
  13. David Card, 1994. "Earnings, Schooling, and Ability Revisited," NBER Working Papers 4832, National Bureau of Economic Research, Inc.
  14. Loury, Glenn C, 1981. "Intergenerational Transfers and the Distribution of Earnings," Econometrica, Econometric Society, vol. 49(4), pages 843-67, June.
  15. Laitner, John, 1993. "Intergenerational and interhousehold economic links," Handbook of Population and Family Economics, in: M. R. Rosenzweig & Stark, O. (ed.), Handbook of Population and Family Economics, edition 1, volume 1, chapter 5, pages 189-238 Elsevier.
  16. Costrell, Robert M, 1994. "A Simple Model of Educational Standards," American Economic Review, American Economic Association, vol. 84(4), pages 956-71, September.
  17. Loury, Linda Datcher & Garman, David, 1995. "College Selectivity and Earnings," Journal of Labor Economics, University of Chicago Press, vol. 13(2), pages 289-308, April.
  18. Laurence J. Kotlikoff & Assaf Razin, 1988. "Making Bequests Without Spoiling Children: Bequests as an Implicit Optimal Tax Structure and the Possibility That Altruistic Bequests are not Equaliz," NBER Working Papers 2735, National Bureau of Economic Research, Inc.
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Cited by:
  1. C. Mendolicchio & D. Paolini & T. Pietra, 2010. "Income taxes, subsidies to education, and investments in human capital," Working Papers 701, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. Tiago Sequeira & Elsa Martins, 2008. "Education public financing and economic growth: an endogenous growth model versus evidence," Empirical Economics, Springer, vol. 35(2), pages 361-377, September.

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