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

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

We develop a general equilibrium model of the market for undergraduate higher education that captures the coexistence of public and private colleges, the large degree of quality differentiation among them, and the tuition and admission policies that emerge from their competition for students. The calibrated version of the model matches well the aggregate characteristics of U.S. higher education including college attendance in public and private schools, tuition levels, and the distribution of federal aid. Predictions about the distribution of students across colleges by ability and income and about the provision of institutional aid are realistic. We use the model to examine the consequences of federal and state aid policies. A one-third increase in the availability of federal aid increases college attendance by 6% of the initial college population, virtually all of the increase being in state colleges and mainly of poor students. Private colleges reduce institutional aid and use the net funding gain to spend more on educational inputs and to substitute some highly able poor students for less able rich students. Reductions in federal or state aid result in reduced attendance mainly by poor students. Reductions of support to state colleges does not cause private colleges to grow but does improve their quality as demand shifts toward them.

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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
Note: ED PE
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  1. 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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  9. Holger Sieg & Dennis Epple & Richard Romano, 2003. "Peer effects, financial aid and selection of students into colleges and universities: an empirical analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(5), pages 501-525.
  10. 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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  13. 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.
  14. Peter Arcidiacono & Gigi Foster & Natalie Goodpaster & Josh Kinsler, 2012. "Estimating spillovers using panel data, with an application to the classroom," Quantitative Economics, Econometric Society, vol. 3(3), pages 421-470, November.
  15. Chade, H. & Lewis, Gregory & Smith, L., 2014. "Student Portfolios and the College Admissions Problem," Scholarly Articles 12363836, Harvard University Department of Economics.
  16. Bruce Sacerdote, 2000. "Peer Effects with Random Assignment: Results for Dartmouth Roommates," NBER Working Papers 7469, National Bureau of Economic Research, Inc.
  17. Dennis Epple & Richard Romano & Sinan Sarpaca & Holger Sieg, 2006. "Profiling in Bargaining Over College Tuition," Economic Journal, Royal Economic Society, vol. 116(515), pages F459-F479, November.
  18. 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.
  19. Manski, C.F., 1991. "Identification of Endogenous Social Effects: the Reflection Problem," Working papers 9127, Wisconsin Madison - Social Systems.
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  21. Dennis Epple & Richard Romano & Holger Sieg, 2006. "Admission, Tuition, and Financial Aid Policies in the Market for Higher Education," Econometrica, Econometric Society, vol. 74(4), pages 885-928, 07.
  22. David S. Lyle, 2009. "The Effects of Peer Group Heterogeneity on the Production of Human Capital at West Point," American Economic Journal: Applied Economics, American Economic Association, vol. 1(4), pages 69-84, October.
  23. 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.
  24. 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.
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