Association for Public Policy Analysis & Management

In the wake of recent dramatic reductions in the demand for legal education, law schools are reacting to the changed marketplace in ways that reveal Coasian “firm behavior” by responding to perverse incentives inherent in the competitive legal education marketplace. For example, to fill empty seats, law schools are enrolling students with lower GPA and LSAT scores than before 2010. Also, new evidence suggests that financial aid award allocation might be influenced by increased pressure to meet minimum enrollment requirements since the Recession. These trends evince market responses on the part of providers of legal education—law schools—as well as consumers of legal education—law students. This study aims to isolate the impact of one such firm behavior: financial aid award allocation. In the competition for shrinking pools of potential law students, law schools can discount the expected cost of attendance through institutionally-provided financial aid awards. This study assesses this trend—the effect of increasing median financial aid award amounts on matriculant enrollment totals and yield rates, controlling for law school and law student covariates—through two competing, but not mutually exclusive, theoretical frameworks: (1)rational choice theory, which holds that demand for legal education is determined by the exchange of information about costs and benefits; and (2) scarce resource theory, which suggests that, like most institutional scholarships, the majority of law school financial aid awards are cross-subsidized.

Employing the use of OLS and fixed effects regression specifications—looking within year, to account for differences in cohorts, as well as within school or U.S. News & World Report peer review rating tier—this study finds evidence of (1) students’ preference to consume subsidized legal education; (2) scarce resources theory; and (3) rational choice theory. These results can be explained as a market response by both law schools and students: reacting to labor market outcomes, as demand for legal education declines and fewer students accept the offers of admission and financial aid awards, the share of the financial aid awards to which law schools avail the students who do accept offers of admission increases. These findings bear out when employing a robust multiple fixed effects specification looking within year and peer reviewed rating tier, and the degree and magnitude hold when testing the sensitivity of the results for bias of the primary independent variable—a law school's median financial aid award amount—using instrumental variable estimation. It is hoped that this study will contribute to the understanding of law schools as competitive market participants.