Spending at Colleges from State Appropriations
Introduction
Public postsecondary institutions are partially financed by state appropriations, which vary in their share of total institutional and may fluctuate due to statewide budget cuts (in response to, for example, economic downturns). Deming and Walters (2018) use the differential exposure of public postsecondary institutions to statewide budget cuts, measured as the share of total revenue coming from state appropriations, as an instrument to study the impact of education spending and tuition changes on college enrollment and degree attainment between 1990-2013 nationwide. Hendren and Sprung-Keyser (2020) use these estimates to project the impact of the policy on lifetime earnings and tax revenue. They utilize estimates from Zimmerman (2014) on the impact attendance of college on earnings and assume that the returns to college are constant in percentage terms over the lifecycle. Hendren and Sprung-Keyser (2020) construct an MVPF for both a decrease in tuition and an increase in spending by postsecondary institutions. This policy corresponds to the increase in spending.
MVPF = 4.0
Net Cost
Hendren and Sprung-Keyser (2020) normalize the change in spending to be $1000 per enrollee, so the direct program costs is the sum of the mechanical increase in per-pupil spending and the behavioral response due to change percentage increase in enrollment, yielding an estimate of $1,046. Increasing the years of public postsecondary education results in additional fiscal impact through the costs of college. To incorporate these costs, Hendren and Sprung-Keyser (2020) use the estimated cumulative enrollment effects for community colleges and four-year programs (calculated and scaled in the same way as the pooled estimate above) and calculate the governments costs per each type of enrollee on data from the Delta Cost Project. Hendren and Sprung-Keyser (2020) then take an average of these costs, weighted by the enrollment levels reported in Deming and Walters (2018). Hendren and Sprung-Keyser (2020) subtract from this average college cost the private contribution in the form of net tuition for induced enrollees, where the net tuition is calculated in the same manner as the costs of college. This gives us a total enrollment cost of $306. After accounting for the increased tax revenue of $560 from the additional years of education, Hendren and Sprung-Keyser (2020) estimate the net cost of the program to be $793.
Willingness to Pay
Using their exposure design, Deming and Walters (2018) estimate that a 1% increase in education spending by a public postsecondary institutions increases enrollment by 0.304% in the current year, 0.796% one year later, 0.845% two years later, and 0.830% three years later across all public postsecondary institutions in the sample. All of these effect sizes are significant at the 5% level at least. Hendren and Sprung-Keyser (2020) sum these changes and take them to be the cumulative impact of increased spending on additional years of education (where an increase in enrollment counts as one additional year of education). The authors note in an earlier version of the draft (Deming and Walters, 2017), that budget shocks are serially correlated, with a AR(1) persistence coefficient estimated to be 0.55. Because Hendren and Sprung-Keyser (2020) are looking at the cumulative impact 4 years from the shock, Hendren and Sprung-Keyser (2020) scale the impact on additional years of school by \sum_{i=0}^{3}0.55^{i}=2.02 to account for the shock persistence.
Hendren and Sprung-Keyser (2020) then use estimates from Zimmerman (2014) to estimate the impact on lifetime earnings. Hendren and Sprung-Keyser (2020) use the results from Zimmerman to estimate a decline in earnings in years 1-7 after enrollment and then an increase in earnings over the rest of the lifecycle. Hendren and Sprung-Keyser (2020) calculate the fiscal externality at 18.9% over the bulk of the lifecycle. This figure comes from their calculation of the effective marginal tax rates based on estimates from the Congressional Budget Office. For the fraction of individuals induced to enroll, Hendren and Sprung-Keyser (2020) subtract off the private contribution, estimated to be the net tuition for public colleges in the US during 2001 (the midpoint between the period of study). The projected earnings gains provide the willingness to pay for all individuals induced to change their behavior and acquire additional years of educations as a result of the institutional spending increase. Hendren and Sprung-Keyser (2020) calculate total willingness to pay by summing those earnings gains with the simple value of the transfer for the fraction of individuals not induced to change their behavior. The resulting WTP from this procedure is $3,173.
MVPF Summary
Combining these estimates, Hendren and Sprung-Keyser (2020) get an MVPF of 4.00. To obtain the confidence intervals, Hendren and Sprung-Keyser (2020) bootstrap the enrollment, earning and tax revenue outcomes. This leads to a 95% confidence interval of [1.25, 20.44].
Hendren and Sprung-Keyser (2020) consider a specification where the spending is valued at the cost of the transfer rather than based on the change in long-term earnings. This conservative method for calculating willingness to pay ignores any effect from increases in earnings. Instead, it applies the envelope theorem to those induced to get more schooling and assumes they are indifferent to the expenditure. All those who do not change their behavior as a result of the scholarship value it as a dollar-for-dollar transfer. The resulting MVPF for this alternate specification is 1.26 with a 95% confidence interval of [0.86, 3.47]. Hendren and Sprung-Keyser (2020) also consider an alternative specification in which Hendren and Sprung-Keyser (2020) use the college costs and tuition estimates that are provided by Deming and Walters (2018), which include non-school expenditures (e.g., scholarships). The resulting MVPF for this alternate specification is 2.11 with a 95% confidence interval of [0.68, 5.24].
The estimates used to calculate this MVPF may have been updated in a more recent working or published version of the paper.
References
Deming, David J. and Christopher R. Walters (2018). “The Impact of State Budget Cuts on U.S. Postsecondary Attainment.” Technical Report. https://scholar.harvard.edu/files/ddeming/files/dw_feb2018.pdf
Hendren, Nathaniel and Ben Sprung-Keyser (2020). “A Unified Welfare Analysis of Government Policies.” The Quarterly Journal of Economics, 135(3): 1209–1318. DOI: https://doi.org/10.1093/qje/qjaa006
Zimmerman, Seth D. (2014). “The Returns to College Admission for Academically Marginal Students.” Journal of Labor Economics, 32(4), 711-754. DOI: https://doi.org/10.1086/676661
Policy Features
- Category
- Education
- Beneficiary Type(s)
- Children and Youth, College enrollees, Students
- Average Age
- 20
- Average Income
- 32017
- Country of Implementation
- United States
- Year of Implementation
- 2001
- Empirical Method
- Difference in Differences
- Research Type
- Secondary
- Peer Reviewed
- No
- MVPF Publication Link
- academic.oup.com/qje/article/135/3/1209/5781614