MACRO: University Research and the Market for Higher Education; Dr Titan ALON (University of California San Diego)

Abstract

This paper develops a model in which university research spending depends endogenously on the market for higher education. Investing in research allows universities to improve their education quality and better compete for tuition and talented students. When students are highly stratified across colleges, or when tuition rises sharply with school rank, universities have strong incentives to spend on R&D even if the direct contribution of research to teaching is small–as it appears to be in the data. The model is consistent with causal evidence from a natural experiment and quantitatively matches important new features of the microdata on university research, like the high correlations between tuition, student ability, family background, and research expenditure. The mechanism can also explain why universities internally fund research using tuition revenue, despite persistently low returns to patenting. The model also delivers new implications for policy. In addition to reducing inequality, need-based tuition subsidies can increase research by stimulating competition between schools. Similarly, federal R&D grants boost research, but also crowd out private spending and contribute to education inequality by concentrating resources at top colleges.

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