Panel Paper: Why Don’t Elite Colleges Expand Supply?

Monday, July 29, 2019
40.S03 - Level -1 (Universitat Pompeu Fabra)

*Names in bold indicate Presenter

Peter Blair, Harvard University and Kent Smetters, University of Pennsylvania

While college enrollment has more-than doubled since 1970, elite colleges have barely increased supply, instead reducing admit rates. For instance, the incoming class of Yale College freshmen stood at 1,346 students in 1979, increasing by only 14 students to 1,360 by 2015. Over the same period, the number of applications to Yale College increased by over 300 percent, from 9,331 students in 1979 to 30,932 in 2015. Such patterns are repeated at elite institutions, while less elite colleges increased supply in response to increasing demand. We show that straightforward reasons cannot explain this behavior. We propose a model where colleges compete on prestige, measured as relative selectivity or admit rates. Higher demand decreases [increases] the admit rate if the weight on prestige is above [below] a critical value, consistent with experience in elite [non-elite] colleges. The calibrated model closely replicates the data while counter-factual simulations without prestige fail. This “prestige externality” is Pareto inefficient, with schools and students worse off, producing large welfare losses.