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The Awkward Economics of Private Liberal Arts Colleges

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Abstract

The main goal of liberal arts colleges is to enhance their prestige, which comes from a reputation for producing high-quality graduates. People judge the quality of a college’s graduates by observable indicators of the quality of the college’s entering students and the quality of its faculty and facilities. Colleges can use endowment earnings and alumni gifts to “purchase” the factors that provide prestige. Need-based and merit scholarships help selective colleges en-roll better students than they could otherwise. They can help less-selective colleges fill empty seats, providing revenue to enhance their educational programs. Many tuition-dependent colleges can offer more need-based and merit scholarships than do colleges with abundant donor sup-port because they post sticker prices that substantially exceed their per-student expenditures. Some schools post sticker prices that exceed what any student pays because students take the posted price as an indication of the value of the colleges’ services. Merit scholarships can crowd out need-based scholarships. But, when schools use merit scholarships to fill empty seats, they can enhance school revenue and support need-based scholarships.

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2018-02-01

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higher education; liberal arts; merit scholarships; need-based scholarships; revenue

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Required Publisher Statement: Published by the Cornell Higher Education Research Institute, ILR School, Cornell University.

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