Do liberal arts colleges maximize profit?

Ann M Gansemer-Topf, Peter Orazem and Darin R. Wohlgemuth

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: Revenue, cost, tuition, and scholarship data at private liberal arts colleges from 2003–2013 are used to estimate how each college's net revenue per student varies with student enrollment. Our empirical specification assumes that colleges simultaneously pick their optimal net tuition and cost of instruction. The estimates allow us to identify the enrollment level that maximizes the return on the college's provision of educational services. Thirty-seven percent of the colleges have enrollments within one standard deviation of their profit maximizing enrollment. Another 11% are more than one standard deviation above the profit maximizing level; they increase access to students but not revenue. Compared to the profit maximizing colleges, the institutions with enrollments beyond their profit maximum have stronger endowments and enroll more low-income students. Although no schools were below their shut-down enrollment, 13% were within one standard deviation of their minimum enrollment and may be vulnerable to tuition revenue shock.

Date: 2021-01-01
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