Money Changes Everything: Funding Shocks and Optimal Admissions and Financial Aid Policies in Higher Education
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Nagler, Matthew G.
The paper examines the effect of a shock to university funding on tuition net of financial aid, admissions selectivity, and enrollment levels chosen by an optimizing university. Whereas a positive shock, such as a major donation, results in lower net tuition and greater selectivity with respect to all students, its effect on enrollment may not be uniform. Student categories given little weight in the university’s utility function may be treated as “inferior goods,” that is, their enrollment may be decreased in the face of a positive shock, while other student categories see enrollments increased. Such students are charged net tuition well above their marginal cost of enrollment and play primarily a revenue- rather than prestige-generating role for the university. Inferences are drawn from the analytical framework concerning the effect on tuition levels of an increase in federal direct-to-student aid, permitting a new perspective on evidence relating to the Bennett hypothesis.
financial aid policy; admissions policy; educational finance; utility maximization models
Required Publisher Statement: Published by the Cornell Higher Education Research Institute, Cornell University.