College Tuition and Income Inequality

Zhifeng Cai

Jonathan Heathcote, Monetary Advisor

July 2018 | Federal Reserve Bank of Minneapolis Staff Report 569

This paper evaluates the role of rising income inequality in explaining observed growth in college tuition. We develop a competitive model of the college market in which college quality depends on instructional expenditure and the average ability of admitted students. An innovative feature of our model is that it allows for a continuous distribution of college quality. We find that observed increases in US income inequality can explain more than the entire observed rise in average net tuition since 1990 and that rising income inequality has also depressed college attendance.