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Merit Aid and Competition in the University Marketplace*

James Dearden (), Rajdeep Grewal () and Gary Lilien
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Rajdeep Grewal: Department of Economics, Lehigh University
Gary Lilien: Department of Economics, Pennsylvania State University

No 9602, Working Papers from Lehigh University, Department of Economics

Abstract: Colleges and universities in the United States increasingly are turning to merit aid offers as a competitive tool to attract better students. Although the total amount of merit aid offered has increased recently, universities vary dramatically in the amount they use to attract top candidates. Intuitively, better (and wealthier) universities, who have better applicants, should offer more merit aid, but the topranked universities actually offer far less than do others, and some top schools offer no merit aid at all. The authors construct a theoretical model to explain this phenomenon and demonstrate that the quality of universities per se does not drive the negative relationship between university quality and merit aid offers; rather: (1) the differences between the quality levels of competitive universities and (2) the universities’ valuations of applicants drive the negative relationship. Top universities offer less merit aid because they and their immediate competitors represent greater quality differences than do more poorly ranked schools and have access to better safety candidates. We provide empirical evidence to support key assumptions and findings of our model.

Keywords: Merit financial aid; university competition; applied game theory; pricing in quality differentiated; oligopoly (search for similar items in EconPapers)
JEL-codes: E32 R10 (search for similar items in EconPapers)
Date: 2006-12, Revised 2007-05
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