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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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  1. Todd R. Stinebrickner & Ralph Stinebrickner, 2005. "What Can Be Learned About Peer Effects Using College Roommates? Evidence From New Survey Data and Students from Disadvantaged Backgrounds," University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers 20054, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
  2. Dennis Epple & Richard Romano & Holger Sieg, . "Admission, Tuition, and Financial Aid Policies in the Market for Higher Education," GSIA Working Papers 2003-04, Carnegie Mellon University, Tepper School of Business.
  3. David S. Lyle, 2007. "Estimating and Interpreting Peer and Role Model Effects from Randomly Assigned Social Groups at West Point," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 289-299, May.
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  7. Johanne Boisjoly & Greg J. Duncan & Michael Kremer & Dan M. Levy & Jacque Eccles, 2006. "Empathy or Antipathy? The Impact of Diversity," American Economic Review, American Economic Association, vol. 96(5), pages 1890-1905, December.
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  12. Scott E. Carrell & Richard L. Fullerton & James E. West, 2008. "Does Your Cohort Matter? Measuring Peer Effects in College Achievement," NBER Working Papers 14032, National Bureau of Economic Research, Inc.
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  16. Arcidiacono, Peter & Nicholson, Sean, 2005. "Peer effects in medical school," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 327-350, February.
  17. Peter Arcidiacono, 2005. "Affirmative Action in Higher Education: How Do Admission and Financial Aid Rules Affect Future Earnings?," Econometrica, Econometric Society, vol. 73(5), pages 1477-1524, 09.
  18. Kim, Matthew, 2010. "Early decision and financial aid competition among need-blind colleges and universities," Journal of Public Economics, Elsevier, vol. 94(5-6), pages 410-420, June.
  19. Tolga Yuret, 2008. "An Economic Analysis of Color-Blind Affirmative Action," Journal of Law, Economics and Organization, Oxford University Press, vol. 24(2), pages 319-355, October.
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  22. Dennis Epple & Richard Romano & Holger Sieg, 2008. "Diversity and Affirmative Action in Higher Education," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(4), pages 475-501, 08.
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