Price Signals in Higher Education

Wellesley College (cc photo by thelehegarets)

Wellesley College (cc photo by thelehegarets)

Catherine Rampbell reports on a new study of what makes colleges appealing:

Traditional economics would suggest that raising the price of an item (such as a college education) would reduce demand for it. But instead this study found that raising tuition — as well as instructional expenditures — actually improves the demand to attend liberal arts schools and schools in the bottom half of the top 50. For example, for liberal arts colleges ranked 26th to 50th, a $1,000 increase in tuition and fees was associated with a 12.9-point increase in SAT scores and a 3.5 percent increase in the proportion of top freshmen admitted.

This is because such costs “serve as markers of institutional quality and prestige,” the authors write.

Ryan Avent offers the slightly different hypothesis that “education at a pricey institution could be a Veblen good, such that an increase in tuition makes the school more desirable as a status symbol.”

The underlying issue, either way, is that there’s very little in the way of reliable information about the quality of undergraduate education in the United States. Our major schools get to select which students they admit, which means that when you’re looking at data about the achievement of graduates it’s hard to know if you’re looking at quality education or just quality inputs. We know that it’s much harder to get into The University of Texas at Austin than the University of Texas at El Paso, so the mere fact that graduates of the flagship campus do better doesn’t tell us much of anything about the quality of instruction. Consequently, “signals” and prestige wind up being hugely important. This, in turn, is an important driver of ever-higher-tuition. There’s basically no numerator of school quality that would allow school administrators to demonstrate that they’re providing more efficient education than their rivals. Consequently, there’s little incentive to pursue efficiency as a goal.