College Choice, Private Options, and the Incidence of Public Investment in Higher Education

Working Paper: NBER ID: w29353

Authors: John Bound; Andrew Simon

Abstract: Previous measures of the incidence of public investment in higher education focus on the transfer to public college students. This implies that the net benefits to students who do not attend public colleges is negative. However, they miss potential general equilibrium effects on the private college and labor markets. Changes in the public college market affect who private colleges admit, what prices they charge, and the number of students who enroll in any college. We show that capturing these spillovers is important for characterizing incidence using a model of higher education that we validate with quasi-experimental variation in state spending. Unlike previous measures, we find that high-income-modest-ability students especially benefit since they are only admitted to high-quality private colleges when state spending is high, and the public colleges create sufficient competitive pressure. Decreased investment also reduces educational attainment, raising the college wage premium. This exacerbates private college market power.

Keywords: Public Investment; Higher Education; College Choice; General Equilibrium Effects

JEL Codes: H22; H7; I23

Causal Claims

Cause	Effect
Decreased state spending per student at public colleges (H75)	Increased demand for private colleges among all students (I23)
Decreased state spending per student at public colleges (H75)	Increased tuition at private colleges (I23)
Increased tuition at private colleges (I23)	Disproportionate effect on low-income students (I24)
Decreased state support (H79)	Scarcity of college-educated individuals (D29)
Scarcity of college-educated individuals (D29)	Driving up the college wage premium (J39)
Decreased state support (H79)	Increased labor market returns to college (J24)
Increased labor market returns to college (J24)	Benefits for those in the private college sector (I23)