The Alchian-Allen Effect in Higher Education: Public versus Private Enrollment

Part of the full cost of participating in higher education is foregone employment. Increases in the unemployment rate imply a lowering of foregone employment opportunities. This, in turn, lowers the full cost of higher education, leading to an increase in the quantity demanded of such education. When the distinction between public and private educational institutions is made, the Alchian-Allen effect can be applied. Just as a shipping cost changes the price ratio of average to “good” apples (Borcherding and Silberberg, 1978), fluctuations in the unemployment rate change the price ratio of public to private education. Specifically, an increase in the unemployment rate implies that the price of public education decreases relative to private education. This decrease should result in an increase in the ratio of public to private enrollment. Our expectation is supported empirically by both time series and more convincingly, cross sectional results.