College Tuition and Income Inequality
AbstractThe average cost of college tuition in the United States has been rising much faster than general inflation for decades. This paper evaluates the role of rising income inequality in driving up tuition. We develop a model in which heterogeneous households decide whether to send their child to college, and if so, to which quality of college. On the supply side, the college market is competitive, and college quality is a constant returns to scale function of instructional expenditure and the average ability of admitted students. An important new feature of our model is that we allow for a continuous distribution of college quality.
We first develop a closed-form characterization of equilibrium in a version of the model with no resource inputs in producing college education. In the second part of the paper we calibrate a richer version of the model. We find that observed increases in US income inequality can explain more than 100% of the observed rise in average net tuition since 1990, and that rising income inequality has also depressed college attendance.