States' support of higher education: A theoretical and empirical analysis

Abstract

This dissertation uses public finance theory and econometrics to examine the variation of expenditures on public higher education among states. The basic theory of public goods and externalities combined with comparative static analysis provides the theoretical framework to examine the effect of possible explanatory variables on optimal subsidy levels for public higher education. Two theoretical models are developed, a one sector model of the higher education market that treats private education as independent of the public market, and a two sector model that recognizes the interdependence of the public and private markets for higher education. Cross-sectional regression techniques are then used to determine the relative importance of differences in the explanatory variables on the optimal subsidy levels and to test the usefulness of separating the two higher education markets. One of the most significant findings is that states react to the vested interest they have in educating their citizens. Variables that influence future state government income are consistently significant in determining the optimal per-student public subsidy. This supports the argument that governments' behavior is affected by their equity interest in the educational investment of their citizens. Another significant finding is that state support of private higher education appears to decrease allocations to public higher education.