College Choice, Private Options, and the Incidence of Public Investment in Higher Education

Abstract Previous measures of the incidence of public investment in higher education focus on the transfer to public college students. However, they miss potential general equilibrium effects on the private college and labor markets. We show that capturing these spillovers is important for characterizing incidence using a model of higher education that we validate with quasi-experimental variation in state spending. Unlike previous measures, we find that high-income-modest-ability students especially benefit since they are only admitted to high-quality private colleges when public spending is high. Decreased investment also reduces educational attainment, raising the college wage premium. This exacerbates private college market power.