The Rotten Kid at College: The Incentive Effects of Higher Education Subsidies on Student Effort∗

This paper utilizes a game-theoretic model to analyze the disincentive effects of lowtuition policies on student effort. The model of parent and student responses to tuition subsidies is then calibrated using information from the High School and Beyond: Sophomore Cohort: 1980-92 and the National Longitudinal Survey of Youth 1979 data sets. The findings are that subsidizing tuition increases enrollment rates, however it also considerably reduces student effort. This follows from the fact that a high-subsidy, low-tuition policy causes an increase in the ratio of less able and less highly-motivated college graduates. Additionally, and potentially more importantly, all students, even the more highly-motivated ones, respond to lower tuition levels by decreasing their effort levels. This study augments the literature on the enrollment effects of low-tuition policies by demonstrating how high-subsidy, low-tuition policies have disincentive effects on students’ study time and adversely affect human capital accumulation.