Pricing in the Not-for-Profit Sector: Can Wealth Growth at American Colleges Explain Chronic Tuition Increases?

In the period 1980–2005 tuition at American private colleges more than doubled in real terms, and these institutions grew much wealthier. I develop a model that establishes conditions under which increases in colleges’ wealth cause higher tuition. The empirical analysis supports the hypothesis that growth in colleges’ wealth is one of the reasons behind rapid tuition growth, although it does not provide accurate estimates of the elasticity of tuition to college wealth. The result is consistent with previous studies that find that part of the increase in colleges’ expenditures over the 1980s and 1990s can be attributed to quality improvement.