Strategic determination of higher education subsidies and tuitions

Strategic interactions of subsidies and tuitions in public higher education are described in a differentiated-product setting where legislatures first determine subsidies and then governing boards of universities set tuition. When revenue of the university is important relative to students' welfare in legislative preferences, commitment to the subsidy prior to the setting of tuition leads to a lower subsidy and a higher tuition than will occur if legislatures determine tuition. In response to an increase in the level of demand for education, there is a decrease in the subsidy and an increase in tuition, which is consistent with the US historical pattern.