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Peer Effects, Financial Aid, and Selection of Students into Colleges and Universities: An Empirical Analysis

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Author Info
Epple, Dennis
Romano, Richard
Sieg, Holger

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Abstract

The goal of this paper is to develop predictions regarding market consequences of peer effects in higher education and to offer empirical evidence about the extent to which those predictions are borne out in the data. We develop a model in which colleges seek to maximize the quality of the educational experience provided to their students. From this model we deduce predictions about the hierarchy of schools that emerges in equilibrium, the allocation of students by income and ability among schools, and about the pricing policies that schools adopt. In the empirical analysis, we use both university-level data provided primarily by Petersons and student-level data from the National Postsecondary Student Aid Study obtained from the NCES. The findings of this paper suggest that there is a hierarchy of school qualities which is characterized by substantial stratification by income and ability. The evidence on pricing by ability is supportive of positive peer effects in educational achievement from high ability at the college level. However, the evidence on pricing also suggests that more highly ranked schools exercise some degree of market power. This is reflected in the substantial variation of price with income coupled with discounts to more able students that are modest at best.

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Paper provided by Duke University, Department of Economics in its series Working Papers with number 00-02.

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Date of creation: 2000
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Handle: RePEc:duk:dukeec:00-02

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Find related papers by JEL classification:
I21 - Health, Education, and Welfare - - Education - - - Analysis of Education
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Dennis W. Carlton & Gustavo E. Bamberger & Roy J. Epstein, 1995. "Antitrust and Higher Education: Was There a Conspiracy to Restrict Financial Aid?," NBER Working Papers 4998, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Janet S. Netz, 1998. "Non-Profits and Price-Fixing: The Case of the Ivy League," Industrial Organization 9808001, EconWPA. [Downloadable!]
  3. Caroline M. Hoxby, 2000. "Benevolent Colluders? The Effects of Antitrust Action on College Financial Aid and Tuition," NBER Working Papers 7754, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Hoxby, Caroline Minter, 1996. "Are Efficiency and Equity in School Finance Substitutes or Complements?," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 51-72, Fall. [Downloadable!] (restricted)
  5. Fernandez, Raquel & Rogerson, Richard, 1998. "Public Education and Income Distribution: A Dynamic Quantitative Evaluation of Education-Finance Reform," American Economic Review, American Economic Association, vol. 88(4), pages 813-33, September. [Downloadable!] (restricted)
  6. Glomm, Gerhard & Ravikumar, B, 1992. "Public versus Private Investment in Human Capital Endogenous Growth and Income Inequality," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 813-34, August.
  7. Thomas J. Nechyba, 2000. "Mobility, Targeting, and Private-School Vouchers," American Economic Review, American Economic Association, vol. 90(1), pages 130-146, March. [Downloadable!] (restricted)
  8. Arnott, Richard & Rowse, John, 1987. "Peer group effects and educational attainment," Journal of Public Economics, Elsevier, vol. 32(3), pages 287-305, April. [Downloadable!] (restricted)
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  9. Rothschild, Michael & White, Lawrence J, 1995. "The Analytics of the Pricing of Higher Education and Other Services in Which the Customers Are Inputs," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 573-86, June. [Downloadable!] (restricted)
  10. Manski, Charles F., 1992. "Educational choice (vouchers) and social mobility," Economics of Education Review, Elsevier, vol. 11(4), pages 351-369, December. [Downloadable!] (restricted)
    Other versions:
  11. repec:fth:prinin:409 is not listed on IDEAS
  12. Gilles, Robert P. & Scotchmer, Suzanne, 1997. "Decentralization in Replicated Club Economies with Multiple Private Goods," Journal of Economic Theory, Elsevier, vol. 72(2), pages 363-387, February. [Downloadable!] (restricted)
  13. Fernandez, Raquel & Rogerson, Richard, 1996. "Income Distribution, Communities, and the Quality of Public Education," The Quarterly Journal of Economics, MIT Press, vol. 111(1), pages 135-64, February. [Downloadable!] (restricted)
  14. Bergstrom, Theodore C & Rubinfeld, Daniel L & Shapiro, Perry, 1982. "Micro-Based Estimates of Demand Functions for Local School Expenditures," Econometrica, Econometric Society, vol. 50(5), pages 1183-1205, September. [Downloadable!] (restricted)
    Other versions:
  15. Stacy Berg Dale & Alan Krueger, 1998. "Estimating the Payoff to Attending a More Selective College: An Application of Selection on Observables and Unobservables," Working Papers 788, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
    Other versions:
  16. Epple, Dennis & Romano, Richard E, 1998. "Competition between Private and Public Schools, Vouchers, and Peer-Group Effects," American Economic Review, American Economic Association, vol. 88(1), pages 33-62, March. [Downloadable!] (restricted)
  17. Thomas J. Nechyba, 2001. "Centralization, Fiscal Federalism and Private School Attendance," NBER Working Papers 8355, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  18. Toma, Eugenia Froedge, 1996. "Public Funding and Private Schooling across Countries," Journal of Law & Economics, University of Chicago Press, vol. 39(1), pages 121-48, April.
  19. Dennis Epple & Richard Romano, 2000. "Neighborhood Schools, Choice, and the Distribution of Educational Benefits," NBER Working Papers 7850, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  20. Steven F. Venti & David A. Wise, 1983. "Test Scores, Educational Opportunities, and Individual Choice," NBER Working Papers 0710, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  21. Robert P. Gilles and Suzanne Scotchmer., 1995. "Decentralization in Replicated Club Economies with Multiple Private Goods," Economics Working Papers 95-243, University of California at Berkeley.
  22. Caroline M. Hoxby, 1997. "How the Changing Market Structure of U.S. Higher Education Explains College Tuition," NBER Working Papers 6323, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Justina A.V. Fischer, 2005. "The Impact of Direct Democracy on Public Education: Performance of Swiss Students in Reading," University of St. Gallen Department of Economics working paper series 2005 2005-10, Department of Economics, University of St. Gallen. [Downloadable!]
  2. Dennis Epple & Richard Romano & Holger Sieg, 2002. "On the Demographic Composition of Colleges and Universities in Market Equilibrium," American Economic Review, American Economic Association, vol. 92(2), pages 310-314, May. [Downloadable!]
  3. Joan Rosselló, 2007. "Does a public university system avoid the stratification of public universities and the segregation of students?," DEA Working Papers 26, Universitat de les Illes Balears, Departament d'Economía Aplicada. [Downloadable!]
  4. Michio Naoi & Hideo Akabayashi, 2004. "Why Is There No Harvard Among Japanese Private Universities?," Econometric Society 2004 Far Eastern Meetings 726, Econometric Society. [Downloadable!]
  5. Michael Fertig, 2002. "Educational Production, Endogenous Peer Group Formation and Class Composition – Evidence From the PISA 2000 Study," RWI Discussion Papers 0002, Rheinisch-Westfälisches Institut für Wirtschaftsforschung. [Downloadable!]
  6. Christopher Cornwell & David B. Mustard, 2006. "Merit Aid and Sorting: The Effects of HOPE-Style Scholarships on College Ability Stratification," IZA Discussion Papers 1956, Institute for the Study of Labor (IZA). [Downloadable!]
  7. Tania Oliveira, 2006. "Tuition fees and admission standards: how do public and private universities really compete for students?," Discussion Papers in Economics 06/6, Department of Economics, University of Leicester. [Downloadable!]
  8. Marisa Hidalgo Hidalgo, 2009. "Tracking can be more equitable than mixing: peer effects and college attendance," Working Papers 09.04, Universidad Pablo de Olavide, Department of Economics. [Downloadable!]
  9. Aysegul Sahin, 2004. "The incentive effects of higher education subsidies on student effort," Staff Reports 192, Federal Reserve Bank of New York. [Downloadable!]
  10. Fischer, Justina A.V., 2007. "The Impact of Direct Democracy on Public Education: Evidence for Swiss Students in Reading, Mathematics and Natural Science," Working Paper Series in Economics and Finance 688, Stockholm School of Economics. [Downloadable!]
  11. Laura Thissen & Sjef Ederveen, 2006. "Higher education: Time for coordination on a European level?," CPB Discussion Papers 68, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  12. Fertig, Michael, 2003. "Educational Production, Endogenous Peer Group Formation and Class Composition – Evidence from the PISA 2000 Study," IZA Discussion Papers 714, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  13. Jeffrey A. Groen & Michelle J. White, 2003. "In-State versus Out-of State Students: The Divergence of Interest between Public Universities and State Governments," NBER Working Papers 9603, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. De Fraja, Gianni & Oliveira, Tania & Zanchi, Luisa, 2005. "Must Try Harder. Evaluating the Role of Effort in Educational Attainment," CEPR Discussion Papers 5048, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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