Admission , Tuition , and Financial Aid Policies in the Market for Higher Education ∗

In this paper, we present an equilibrium model of the market for higher education. Our model simultaneously predicts student selection into institutions of higher education, financial aid, educational expenditures, and educational outcomes. We show that the model gives rise to a strict hierarchy of colleges that differ by the educational quality provided to the students. We develop an algorithm to compute equilibria for these types of models. We also develop a new estimation procedure that exploits the observed variation in prices within colleges. Identification is based on variation in differences in fundamentals such as endowments and technology, and not on the observed variation in potentially endogenous characteristics of colleges. We estimate the structural parameters using data collected by the National Center for Education Statistics and aggregate data from Peterson’s and the National Science Foundation. Our empirical findings suggest that our model explains observed admission and tuition policies reasonably well. The findings also suggest that the market for higher education is very competitive.