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Student
Title
Supervisor
Faculty
Educational Programme
Final Grade
Year of Graduation
Mariia Verbetskaia
Government Regulation of the Market for Higher Education
2018
This paper presents a model of strategic competition between universities, where at the first stage universities choose education quality investment and at the second stage decide on tuition fees. The model is different from the standard vertical differentiation model due to the existence of positive spillover effect from education (peer effect). It was demonstrated that in the presence of peer effect strategic competition results in inefficient student allocation between the two universities (biased to the high-quality university) and excessive quality differentiation.

The model is used to analyze the implications of government funding policies as well as admission and quality regulation. The comparative statics analysis is performed and, in particular, the effect of different forms of government regulation on equilibrium quality investment levels, tuition fees and enrollment to each university, students and social welfare was analyzed. It was demonstrated that standard institutional funding and students’ financial aid programs like tuition fee subsidy, quality investment subsidy or total cost subsidy reduce social welfare. At the same time an introduction of provision of tuition-free education for the best students combined with a per-student grant provided to the university improves both students’ and social welfare. It was also demonstrated that tight admission regulation is not socially desirable while an introduction of minimum quality standard makes society better off.

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