State Government Subsidy Composition for Higher Education: Driving a Divergence Between Education and Amenities

Abstract

Changes in the composition of state government subsidies for higher education continue to favor grant aid that targets student income and/or achievement over appropriations that target state residency. Given evidence that student demand for college goods and services is heterogeneous along dimensions of income and achievement, this study examines if post-secondary institutions respond to state subsidy composition such that expenditure shares diverge between educational resources and amenities. Results indicate that an increase in the proportion of total state subsidies delivered via grant aid is associated with institutions shifting expenditures across budget categories in systematic ways. Whether institutions increase expenditure shares on education or amenities depends on the type of grant that receives a greater share of total state subsidies as well as the sector and selectivity of institution. Implications for state subsidy policy and educational attainment are discussed in light of the evidence.