Title: Three Essays on the Economics of Higher Education
Description: As the primary transmitter of advanced skills and incubators of new knowledge, colleges and universities play a crucial role in modern economies. In the U.S., the higher education sector consists of a diverse set of institutions. Public, private non-profit, and private for-profit organizations coexist in this market. Although large research universities constitute what we usually think of as higher education institutions, the vast majority of colleges and universities do not follow the model of the research university. Some are two-year institutions with Associate’s degrees as their highest degree offering. Some are Baccalaureate institutions offering undergraduate education only. Some are Master’s universities who offer some graduate instruction but do not engage in research as much as research universities do. Unlike traditional firms that rely on sales revenue to cover their costs, many colleges and universities rely on external funding from the government and private donors. Like other non-profit institutions, many of them have large amounts of endowment funds that general investment income to support the institution.

Given the diversity of organizations in this sector, how well do conventional economic theory describe their behavior? Do non-profit and for-profit institutions face the same incentives? How does the profit status affect the behavior of the university? What is the role of endowments in higher education finance? How does the performance of the endowment affect the real operations of the university? Are instructions at two-year and four-year colleges of similar quality? Is it wise for some students to start in two-year colleges and transfer to a four-year college rather than starting in a four-year college directly? These are the questions I attempt to answer in this dissertation. Chapter 1 investigates whether for-profit and public community colleges respond differently to increases in demand for occupational education. I exploit a regulatory change, which broadened the scope of practice for dental assistants (DAs) and led to significant increases in DAs’ wages and employment. In response to this change, for-profit universities substantially expanded their DA programs, whereas most community college DA programs maintained their existing size.

Moreover, community colleges that charged a high premium for the DA program expanded their DA programs, whereas those that did not charge a premium downsized their DA programs. These results are consistent with a for-profit sector that maximizes profits and a public sector that sets capacity to balance its budget. Chapter 2 studies how universities responded to the large and negative financial shocks to their endowments induced by the Great Recession. Exploiting variations across universities in the relative size of their investment losses during the Great Recession, I found sharp contrasts among Doctoral, Master’s, and Baccalaureate Universities both in how they responded to the endowment shocks and in how their students fared after the Great Recession. In response to large, negative endowment shocks, Doctoral Universities cut down on instructional expenses and reduced faculty and staff of all types; Baccalaureate Colleges cut down on administrative and supportive expenses and reduced non-tenure-track instructors and staff; Master’s Universities reduced research expenses and size of the tenure-track faculty.

Meanwhile, Doctoral Universities cut student financial aid and admitted fewer low-income and Hispanic students. Master’s and Baccalaureate institutions also admitted fewer low- income students. Most notably, the negative endowment shocks led to significant reductions in student persistence and graduation rates at Doctoral and Master’s Universities, while having no such effects on Baccalaureate Colleges. As the tuition and living expenses of four-year colleges continue to rise, spending the first two years of college at a community college and transferring to a four-year college has become a more cost-effective way to obtain a university degree. In Chapter 3, a joint paper with Zach Brown, we examine the labor market outcomes of transfer students relative to students who attend a four-year institution directly in the United States. We find a large negative effect on wages driven by selection on unobservables. Instrumental variable estimates using data from the National Education Longitudinal Study imply a 27% reduction in wages from attending a two-year college conditional on eventually attending a four-year institution.

This is true regardless of whether we control for four-year college quality. Since students who obtain a bachelor’s degree have no reason to reveal their transfer status to employers, this is evidence that college quality has important implications for labor market returns independent of signaling effects. We also find some evidence that the negative effect of transferring is largest for women as well as students at the lowest and highest ends of the ability distribution.