Looks like rich kids are driving up college costs

A few days ago, I had a purely speculative post about the possibility that the consumption preferences of rich kids are driving up the cost of college. The basic idea of the piece is simple. Most kids do not go to college because they love education. They do so because college is the gatekeeper of higher income jobs. So when they are in college, these students are looking to have as much fun as possible while capturing the degrees they need for that sweet wage premium. Luxurious amenities like arenas and fitness centers and expensive dorms help them have that fun. Since most students are not that cost-constrained — 74 percent of students at the top 147 universities come from the richest quarter of households — they may just prefer to spend a few thousand more a year to get the coolest stuff. And that preference would plausibly drive up college costs.

Although the post was speculative, Matt Yglesias has a post today with a cite to research on this topic. The study is over at the NBER website and is hilariously titled College as Country Club: Do Colleges Cater to Students’ Preferences for Consumption? From the abstract:

We find that most students do appear to value college consumption amenities, including spending on student activities, sports, and dormitories. While this taste for amenities is broad-based, the taste for academic quality is confined to high-achieving students. The heterogeneity in student preferences implies that colleges face very different incentives depending on their current student body and the students who the institution hopes to attract. We estimate that the elasticities implied by our demand model can account for 16 percent of the total variation across colleges in the ratio of amenity to academic spending, and including them on top of key observable characteristics (sector, state, size, selectivity) increases the explained variation by twenty percent.

The paper is long and I will admit to not having read all of it. The authors appear to have created a demand-side model that predicts the kinds of schools that would face more pressure to spend on consumption amenities. Then then they looked to see whether those schools actually were responding to that pressure. That is, were schools that their model suggested would face more demand for consumption amenities actually spending more of every dollar on those amenities than schools that their model suggested would not face as much demand? And the answer is yes.

This is hardly a slam dunk of course for my speculation that rich kids are driving up the costs of college by demanding a bunch of non-instructional stuff that lets them have more fun. But it certainly brings you closer to that conclusion. College costs are not contained just to these kinds of amenities, but to the extent that increased spending on these amenities is driving some of the increase in the cost of college, it looks like some of the blame falls on these rich kids whose demand preferences are driving this kind of spending.