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The U.S. Market for Higher Education: A General Equilibrium Analysis of State and Private Colleges and Public Funding Policies

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  • Dennis Epple
  • Richard Romano
  • Sinan Sarpça
  • Holger Sieg

Abstract

We develop a new general equilibrium model of the market for higher education that captures the coexistence of public and private universities, the large degree of quality differentiation among them, and the tuition and admission policies that emerge from their competition for students. We use the model to examine the consequences of federal and state aid policies. We show that private colleges game the federal financial aid system, strategically increasing tuition to increase student aid, and using the proceeds to spend more on educational resources and to compete for high-ability students. Increases in federal aid have modest effects in increasing college attendance, with nearly half of the increased federal aid offset by reduced institutional aid and increased university educational expenditures. A reduction in state subsidies coupled with increases in tuition at public schools substantially reduces attendance at those universities, with mainly poor students exiting, and with only moderate switching into private colleges.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19298.

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Date of creation: Aug 2013
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Handle: RePEc:nbr:nberwo:19298

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