College Pricing and Income Inequality

Jonathan Heathcote and Zhifeng Cai

No 1623, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We develop a quantitative model to explore the impact of rising income inequality on college tuition. The framework is one in which households value college quality, and where quality reflects both resources devoted to tuition and the average ability of the student body. Thus colleges are ``club goods'' where students are both inputs to production and consumers of output. Assuming a competitive, profit-maximizing environment, we show that observed changes in household income inequality can account for (i) the observed rise in average tuition, (ii) the rise in tuition dispersion across colleges, (iii) the rise in tuition dispersion within colleges, and (iv) the observed stagnation in aggregate college attendance.

Date: 2016
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