Merit Scholarships and Conspiracies in Restraint of Trade

We spent last week visiting colleges that my son is thinking of applying to. The experience reinforced the impression I had earlier gotten from web pages—that what Harvard (and, mutatis mutandis, Vassar and ...) wants are students who decided, at age fourteen, that their highest priority for the next four years was doing whatever it would take to get into Harvard. It also raised an interesting puzzle. A number of the schools we visited claim to have very generous financial aid programs based on need, but no merit based scholarships at all. How and why?

Why the schools, collectively, would want such a policy is pretty clear. Bidding against each other for the very best students—which is what merit based scholarships amount to—is costly. From a financial standpoint, they are better off if they all refrain. From an ideological standpoint, I expect most of those involved in the process would rather spend their money on smart poor students than on very smart rich ones.

But what is in the collective interest of all is not necessarily in the private interest of each. Schools benefit by having extraordinarily good students—and even the Harvards and Vassars of the world do not have an unlimited supply of such. Brilliant students are fun to teach, which makes the school more attractive to potential faculty. They create intellectual excitement, which makes it more attractive to applicants. And, with luck, they end up with fame and/or fortune, some of which may get shared with their alma mater. If all the elite schools refrain from bidding for such they save a good deal of money, and lose only to the extent that some brilliant students who can afford Harvard decide to go to some less elite but more generous school instead—which should not be too much of a risk if the lack of generosity applies only to students whose parents can afford Harvard without financial aid. But if an individual elite school breaks ranks, it has the opportunity to push itself higher in the select company of elite schools.

The logic is very much the same as in an ordinary cartel agreement. All firms in the industry benefit by keeping output down and prices up, but each firm benefits even more if the others follow that policy while it cuts prices a little and expands output a lot.

Which raises an obvious suspicion—that what I am observing is indeed cartel pricing, that some subset of elite schools, containing schools that believe they are competing mostly against each other, have made an implicit agreement to refrain from competing for potential students who are both extraordinarily able and financially well off.

About twenty years ago, eight Ivy League schools were accused by the Justice Department of just such an arrangement—sharing information on student applicants, agreeing not to offer merit based scholarships, avoiding competition for the best students. The controversy was settled by a consent agreement, in which the schools agreed to a variety of things, including ending the annual meetings at which they, along with 15 other schools in the Northeast, discussed the financial aid applications of students that had been accepted by more than one of the schools. My observation of current financial aid policy suggests that at least some of the schools involved may have continued, or resumed, the same practices, probably in a less visible form.

Assuming that is what is going on, what are the implications–aside from the possibility of future collisions with the Justice Department? The obvious one is that wealthy schools will be a little richer, and wealthy parents of very smart kids who want to go to those schools a little poorer; off hand I don't see anything particularly bad (or good) about that.

The less obvious one is that the position of elite schools, at least the ones refusing to compete for top students, will be a little less secure. A few years ago, when my daughter was looking at colleges, one of the ones she seriously considered was Saint Olaf. One thing that struck us in the process was an email from their admissions officer, informing us that by applying a little earlier our daughter could be considered for a merit scholarship. Saint Olaf was, and is, a school a little below the level of Harvard, Vassar, and the like—and trying to work its way up.

A second thing that struck us about that particular interaction is relevant to my earlier post about the desire of elite colleges for students whose academic records all fit the same pattern—the desire for a cookie-cutter elite. The reason the admission officer gave for sending the email was that our daughter was home schooled, and Saint Olaf had found that home schooled students were sometimes very well qualified, hence potential recipients of merit scholarships.

That was very nearly the opposite of the reaction we were getting from other schools, whose attitude was that they were willing to consider home schooled students but not at all sure how to handle their applications, and would much prefer that such applicants do their best to obtain conventional credentials by taking some graded courses somewhere, anywhere, before applying. It was the admission officer at Saint Olaf who told us that what blew them away was the list our daughter included in her application of books she had read—four hundred of them.

All of which suggests that the indirect effect of the policies of the elite schools may be to open up American collegiate education to a little more competition. Which might be a good thing.