Imperfect competition in the higher education market with financial aid

It is difficult to formulate a theory of school behavior in the higher education market for a variety of reasons; complex school objectives, positive externalities, technology in which consumers provide inputs, market imperfections, and extensive governmental involvement are some of them. In this dissertation, a theoretical model to study behavior within the postsecondary education market is constructed. The focus is mainly on the behavior of the educational institutions and equilibria under alternative market structures and under different types of governmental involvement, through grants or loans to students.; We study how equilibria depend on schools' objectives and availability of financial aid. More specifically, we analyze school price and quality, the distribution of students among schools, and the distribution of economic welfare in equilibrium. Alternative objectives for schools, both profit and net educational output maximization, are examined. We find that stratification based on student ability and income occurs even without peer effects.; Price discrimination is found to be a powerful tool for schools, especially for high-quality schools. We find equilibrium quality and prices are lower when schools maximize profit than when they maximize net output. We also find that total welfare does not change much with alternative objectives of schools, however, the distribution of welfare among individuals changes.; We examine the impact of alternative forms of financial aid, and find that the results with grants are quite different from the results with loans. Tax-financed grants lower school quality, but increase school attendance and total welfare. Introducing student loans at the market interest rate increases the quality and price of education and raises social welfare, but lowers school attendance.