A general equilibrium analysis of state and private colleges and access to higher education in the U.S.

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. A quantitative version of the model matches well estimates of enrollment elasticities, variation in need-based and merit-based institutional aid with, respectively, student income and ability, and aggregate characteristics of U.S. higher education including college attendance in public and private schools, tuition levels, and the provision of federal aid. Predictions about the provision of federal aid and the distribution of students across colleges by ability and income match the empirical counterparts well. We use the model to examine the consequences of federal and state aid policies. A one-third increase in the maximum federal aid increases college attendance by 6% of the initial college population, most of the increase being in state colleges and mainly of poor students. Elite 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 substantially reduced attendance mainly by poor students. Reductions of support to state colleges induce private colleges to increase enrollments modestly and improve in quality as demand shifts toward them.