EITM: Collaborative Research on Equilibrium Models of Competition in the Market for Higher Education: Theory and Evidence

University Of Florida, Gainesville FL

Investigators

Abstract

This project studies how colleges and universities use their admission and financial aid policies to compete for students. The research will yield better information about how colleges vary in instructional expenditures. It will also give new information about variation within and across colleges in family incomes, standardized test scores, and the racial composition of their student bodies. The research will also characterize how financial aid varies with standardized test scores, family incomes, race/ethnicity, and other characteristics of students. The researchers will also evaluate how colleges, students of color, and white students value ethnic/racial diversity in choosing a college or making admissions decisions. The research approach entails theoretical analysis and parallel computational and empirical analysis. The research methods will be adopted to allow for informational asymmetries between colleges and their prospective students, asymmetries that have potentially important implications for admission and financial aid policies. This creates a challenging statistical problem that will require new techniques. Standard approaches used by other researchers to study other markets are not a good choice for analyzing the market for higher education for two reasons. First, product characteristics are endogenous because colleges choose how much to spend on teaching and also influence the composition of their student bodies. Second, because of financial aid prices for a given student type will differ across colleges but are only observed at the college attended. The research team will develop new statistical techniques to deal with these problems. The research will develops and estimates a general equilibrium model of higher education and uses the model to study public policy issues. The general equilibrium framework is particularly important for study of policy issues that may change the equilibrium financial aid and admission policies of all institutions of higher education. Among the key contributions of the research is endogenizing college qualities in a general equilibrium framework with asymmetric information. Because the college objective function that is modeled and tested differs from profit maximization, this research adds to the theoretical and empirical literatures on nonprofit institutions. The research also contributes to understanding of peer effects by elucidating the way in which peer effects affect college qualities, admissions decisions, and financial aid policies, and by developing empirical evidence about the extent to which observed admission and financial aid policies are consistent with the model's predictions. A further, related innovation in the research is study of the effects of diversity in a general equilibrium framework. Finally, this project is on the frontier of integrating theory, computation, and estimation. Key public policy elements of this research are study of the effects of federal financial aid policies and study of the role of publicly funded state universities. The research considers the effect of affirmative action policies on student body composition. The research also investigates the effect of federal financial aid policies on college access, taking account of the way in which federal aid policies and college competition lead to changes in aid provided from colleges' own resources. The research will contribute to understanding how state funding policies and admissions policies of public universities affect access and costs of college. The research thus has the promise to provide a significant advance in understanding and quantifying the effects of public policy on college access and college costs for different racial and socio-economic groups.