Subsidizing heterogeneous higher education systems

Abstract

In many countries, there is an ongoing debate on the public funding of the higher education (HE) system. Our goal is to examine the theoretical justification for the establishment of HE institutions and analyze the self‐selection of students under different policies of student subsidies. We study nonstationary equilibria of an overlapping‐generation economy in a hierarchical education system. Given the capacity constraints of Universities, we explore the impact of adding new institutions, to be called Colleges, to the HE system, focusing on three issues. Given that Colleges are less productive and less selective than Universities: (a) Should the government establish Colleges? (b) Should the government divert funds from Universities to Colleges? On the basis of long‐run economic growth considerations, we obtain positive answers to both questions. (c) Then, we compare several policies of student subsidies across the board. Our results suggest that much caution is needed in the implementation of student subsidies. Specifically, targeting subsidies to the highly‐ranked students in each institution may distort their self‐selection across institutions and downgrade the human capital accumulation in the economy. To offset this distortion in the demand for HE it may be useful to target subsidies to the low‐ranked students in each institution. Our model also accounts for several stylized facts over time: (1) the increase in the number of institutions and students, (2) the decline in College admission standards, and (3) the decline in public budget per student and the corresponding increase in out‐of‐pocket student payments.

Is partial privatization of universities a solution for higher education?

“…It is even easier to see that the firm's profit is also increasing with the quality, which induces the firm to choose the maximal quality if it were up to it to make this choice, whether this choice is made after or before the choice of tuition fees (See Footnotes 13 and 15). Hence we show that the equilibrium net salary, utility of the workers and the firm's profit are increasing with the quality of education, which corresponds to the assumptions made by the previous papers (Becker, 1975; Hatsor, 2014; Hatsor & Zilcha, 2020).…”

“…The quality to which Hatsor refers is the quality of teaching, not of the product. Hatsor and Zilcha (2020) suppose that attending a university augments the basic skills (or the earning potential) by some factor and that production is carried out by competitive firms with no differentiation.…”

University–firm competition in basic research: Simultaneous versus sequential moves

“…Cabon‐Dhersin and Gibert (2019, 2020) propose models combining interfirm spillovers and one‐way university‐to‐firm spillovers to shed light on the socially optimal funding of R&D and its relationship to spillovers, both in cooperative and noncooperative settings. Hatsor and Zilcha (2020) investigate efficient government subsidization of different classes of universities through student aid and selection. Lahmandi‐Ayed et al (2021) study a model of vertical successive monopolies where university graduates form an input to firms that produce for a product market, but focuses on the value of education for the labor market.…”