Abstract
This paper challenges the notion that optimal non-resident tuition fees should necessarily be raised if the return rate of foreign students after graduation increases. The analysis of a host country’s optimal pricing behavior therefore incorporates a specific student migration model. Students usually are aware of the fact that they might return to their home countries after being educated abroad, even if they initially intended to stay on in the host country. With rational expectations, a change in students’ perceptions of the return probability after graduation can affect their first-round decisions whether to study abroad. The optimal adjustment of non-resident tuition fees in the host country has to take this behavioral response into account. Under certain conditions, the behavioral effect is dominant, and a decline in stay rates of students actually requires tuition fee cuts.
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