Tuition and Wealth at American Colleges

Since 1980 tuition fees at American colleges have increased dramatically, particularly among private not-for-profit four-year colleges. This paper contributes to explaining the behavior of tuition fees at these institutions with an original matching model of the market for higher education. In the model, colleges differ in wealth, students differ in talent and tuition fees are the transfers inside each student-college match. An increase in the returns on college education results in higher tuition fees. The model has two novel predictions that link wealth and tuition fees. A proportional increase in colleges ’ wealth translates into higher tuition fees. When a college becomes wealthier, it increases tuition fees. The evidence supports the link between wealth and tuition for the period 1980-2005 and earlier periods of the twentieth century. This paper concludes that the increases in the returns on college education and in colleges’ wealth observed after 1980 have significantly contributed to the sustained growth in tuition fees during the same period. ∗ This work has benefited enormously from the comments and advice of Derek Neal, Gary Becke