The Effect of Government Subsidies-in-Kind on

Private Expenditures:
The Case of Higher Education
Author: Sam Peltzman

Group:
Renato Florian
Ricardo Zavalaga
Sebastian Portocarrero

Wednesday, September 23
Introduction
Purpose: Examine the effect of the particular subsidy-in-kind on total consumption of higher education

● Producer
Other examples of public goods:
● Consumer
- Elementary and secondary education
- Medical care
● Lower Price - Judicial system
● Money Transfer (RP) - Recreation

Additional cost Supplement the subsidy with

(market price) private funds. (disburs by
gov)

Subsidy-in-kind
 - Choose an institution (Q)
The effect of subsidy-in-kind - Pend: Price = 1$

1) Sum of money:
- Non-S: AHB
- Sub: ACDE

2) Rebate a fraction
- Non-S: AHB
- Sub: ADE, (AC=DH)

3) Subsidy-in-kind (reality)
- Non-S: AHB
- Sub: ADHJ (*)

Subsidy-in-kind´s effect (Ambiguous)

- Preferences (Income effect)

- Number of consumers 🔼 🔽
- Impure Public Good
- Effect of subsidies on total
consumption and effect of
consumption per consumer
Empirical Evidence

Assumptions

● Labor is sufficiently mobile between states so that nominal salary differences reflect differences in skill

● For simplicity, it is assumed here that one dollar spent by a state university means that every person in
the state is offered the opportunity to purchase $1 of higher education at less than $1 per unit.

● A common price for a unit of higher education across states

Model

● The units of observation are the states of the United States.

● Consumption of higher education in each state is measured by per capita dollar expenditures of
institutions of higher education located in the state.

● The extent of state consumption subsidies in kind is measured by the per capita expenditures of public
higher education institutions in each state
Model (1)

We wish to estimate the reduction in spending on private higher education caused by spending on state
institutions. So we build a model that permits feedbacks between private and government expenditures.

Pi= per capita expenditures by private institutions of higher education in state i

a,c =
Xi= a vector of exogenous determinants of pi
Yi=a vector of exogenous determinants of gi
Gi= per capita expenditures by government institutions of higher education in state
b= the extent to which a dollar of government expenditures decreases private expenditures
d= the extent to which private expenditures substitute for government expenditures
Model (2)

Model adjustments

● Purchase of higher education entails investment in human capital, the net rate of return on this investment should
be included in both Xi and Yi

● The consumption component of the demand for higher education is expected to vary with income and "tastes"

YP = personal income per capita in state i

YG = state-goverment income per capita in state i
MP =net per capita emigration of students from state i who would otherwise have attended private institutions in state i
MG = net emigration of students from state i who would otherwise have attended government institutions in state i, per
capita
E =number of high school graduates aged 18 to 21 in state i, as fraction of population
I =number of households in upper-middle- and upperincome groups in state i, as fraction of households
A, C = constants
u, v = random variables
Estimates of the model (1)
1966-1967 year academic data
● Basic information
Estimating technique: two stage least squares
Estimates of the model (2)
Money subsidy vs.
Subsidy-in-kind

Subsidy of $24.14

Reduction of education
consumption of $13.08

54 cents per dollar vs.

Conclusion

Is total consumption of higher education made higher or lower than it would otherwise be by government
subsidies-in-kind?

What is the magnitude of any effect on consumption?

To what extent is enrollment increased by government subsidies-in-kind?

Is higher-education consumption per student increased or decreased by subsidies-in-kind, and by how

much?