The Effect of Market Integration on Public Higher Education

This paper assesses the relationship between prices and market integration in public higher education. The analysis focuses on the effect of Tuition Reciprocity Agreements (TRAs) on in-state resident tuition and fees of 4-year public institutions. Those agreements, which lower tuition for out-of-state students, can be understood as market integration devices. Market integration through TRAs is analyzed under the framework of an in-state subsidized market where demand has now access to a bigger choice set of partially subsidized institutions, changing decisions towards higher expenditure and quality. Using longitudinal data, I present strong evidence that the market integration of TRAs sparked an increase in 4-year public institution in-state prices. The result holds for both selective and non-selective institutions. In the same line, the TRAs have also increased the faculty/student ratio among selective institutions. These findings rearm the idea that part of the increase of prices in higher education is explained by market integration, as suggested by Hoxby (1997).