Essays on university competition

Zachary G Davis, Purdue University

Abstract

The dissertation is comprised of two independent chapters on competition between universities and how government policy changes the nature of the competition. The first chapter looks at how in-state tuition effects competition between public and private four year universities. The second chapter looks at how federal aid effects the behavior of individual for-profit universities, and estimates the effect of a rule change on the amount of federal aid revenue collected by for-profit universities. In the first chapter, I note that universities use institutional aid to discriminate between students of differing abilities. I estimate that public universities provide $107 of aid per ACT point on average, while private universities provide $238 of aid per ACT point on average. In public sector universities, in-state and out-of-state students are offered similar amounts of institutional aid per ACT point. However, private universities use institutional aid to discriminate between in-state and out-of-state students, providing in-state students approximately twice as much institutional aid per ACT point than out-of-state students. Since students pay the same tuition at private universities regardless of their home state, this location based discrimination is surprising. I develop a general equilibrium model populated with heterogeneous educational institutions to explain why private universities price discriminate in favor of in-state students. The model shows that a low in-state tuition and student preferences for staying in their home state supports private, but not public, universities offering lower net prices to in-state students as an equilibrium. I then illustrate how the model can be used to evaluate public policy changes, such as changes in public tuition policies and changes in state subsidies to public universities. The model predicts that decreasing a public university's in-state tuition causes the private university in the same state to decrease enrollment which increases the average ability of their student body. The overall effect of the tuition decrease causes the share of low ability students attending a university to increase. In the second chapter, I investigate the effect of the Higher Education Opportunity Act (HEOA), passed in 2008, which reauthorizes the Higher Education Act of 1965. The HEOA relaxed the 90/10 rule, which requires for-profit institutions to receive at least ten percent of their revenue from non-federal sources, on for-profit institutions by revoking federal aid eligibility after two years of violating the rule instead of one year, which went into effect in 2010. When submitting regulatory compliance reports, postsecondary institutions are allowed to bundle together different campuses. I study the effect disallowing bundling would have on the number of for-profit campuses, and the effect of the rule change on for-profit institution bundling behavior and the amount of federal aid revenue received by for-profit institutions. I find that students at for-profit institutions more federal aid after the rule change, even after accounting for demographic changes. I create a theory comparing for-profit institution bundling behavior under the two different violation rules. I find that for-profit institutions increase the size of the bundles under the two year violation rule, which I also observe in the data. I find that unbundling the campuses approximately doubles the number of one year violations though the number of two year violations remains roughly the same. Before the rule change in 2010, the majority of one year rule violators where bundled with other campuses. I also estimate the amount of federal aid revenue for-profit institutions receive with and without the rule change. I find that for-profit institutions receive almost one billion dollars more federal aid revenue under the two year violation rule, which is about 4.5 percent more than they would have received under the one year violation rule.

Degree

Ph.D.

Advisors

Barron, Purdue University.

Subject Area

Economics

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