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College Tuition and Income Inequality

Staff Report 569 | Revised July 9, 2020

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Zhifeng Cai Rutgers University
Jonathan Heathcote Monetary Advisor
College Tuition and Income Inequality


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 half of the observed rise in average net tuition since 1990 and that rising income inequality has also depressed college attendance.

Published in: _American Economic Review_ (Vol. 112, No. 1, January 2022, pp. 81-121),