The economics and politics of scholarships

Abstract

L oyalty to alma mater often amounts only to quaint sentimentalism and a useful inducement to philanthropy; but this loyalty also allows elite colleges and universities to mobilize their most influential alumni to protect their economic interests. The sorry ending to the story of the antitrust case against the Ivy League colleges and the Massachusetts Institute of Technology (MIT) for conspiring to limit financial aid to undergraduate students provides an unfortunate illustration of this political clout. In the face of pressure from leading newspapers and prominent politicians, the Justice Department agreed in December 1993 to a highly favorable settlement for the Ivy colleges and M1T. The colleges, however, were not satisfied. To achieve total victory, they successfully lobbied Congress last year to amend existing laws to override the settlement's only substantial restriction on financial-aid policy. Now, all colleges are legally free to limit financial aid by collusion and, more important, to deny undergraduates the benefits of merit scholai'ships. Almost forty years ago, the eight colleges in the Ivy group--Brown, Columbia, Cornell, Dartmouth, Harvard, Pennsylvania, Princeton, and Yale--along with MIT, formed a cartel to limit competition for desirable undergraduate students. The members of the cartel agreed not to award meriC scholarships to undergraduates and to give undergraduate financial aid only on the basis of need. In this context, merit is a shorthand for any characteristic that makes a student especially desirable to a particular college. Colleges are eager to attract students who have exceptional academic, artistic, or athletic talent not only because most faculty prefer to teach students who are smart and interesting, but also because the academic, artistic, and athletic achievements of talented students enhance the reputation of a college and the value of its degrees. In short, exceptional students not only please alumni, but also makes such colleges more attractive to prospective students. In this regard, colleges are like any business: quality customers enhance the reputation of the product and attract other customers. By agreeing to give only need-based undergraduate financial aid and also by adopting a niggardly definition of need, the Ivy colleges and MIT were able to enroll desirable students while not giving them more than the minimum amount of necessary financial aid. Without an agreement about merit scholarships, competition for desirable undergraduates would have led to large increases in financial aid. Moreover, Ivy colleges with the largest endow-