Wednesday, March 10, 2010

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.


Unknown said...

none of the applications I filled out gave you room for the titles of 400 books. indeed, i don't think any of them had the slightest interest in what we had read.

wintercow20 said...


I am an economist and parent of two small children. I am seriously considering homeschooling them. The resources I have been looking through I have been found wanting. I'd really appreciate hearing more of your thoughts on the experience, how one ought to get started, and some general tips on the whole thing.

Many thanks in advance! If it makes any difference, I assign several of your Law's Order chapters to my Environmental Economics class, and my micro students use your webbed textbook in addition to my own notes.

David Friedman said...

You can find my two long posts on home unschooling at:

Feel free to email me if you have questions.

William B Swift said...

The combination of college accreditation and professional licensing is the ultimate "conspiracy" in restraint of trade. Just because it's legal (mostly gov't enforced, not just approved) doesn't make it any better for society as a whole nor for the individuals shut out by the system.

Anonymous said...

You're an idiot.
Comparing Harvard and Vassar LOL.
Vassar is a school for talentless individuals who couldn't get into a good school.
The top schools don't have a problem recruiting top talent. Maybe your homeschooled kids don't realize yet that they are not top talent. Did your daughter get into Harvard? I'm guessing not.

Max Marty said...

Hi David. One theory for why these schools do not offer merit based scholarships is the following:


IF - The criteria upon which a person is given a merit scholarship is a relatively weak predictor of future success.

AND IF - Actually going to Harvard is a relatively strong predictor of future success, independent of prior academic history.

Then - it is possible that a person who came from a non-well-off family but ended up successful will tend to attribute that success to their going to Harvard more than a person who came from an already affluent family, who may attribute their success to their lineage and going to Harvard as having been incidental.

Given all that, you'd expect that those who went to Harvard on merit scholarships are less likely to give to Harvard in the future - relative to those who were granted the chance to go to Harvard based based on a needs-based scholarship.

Andrew said...

The Ivy League schools don't offer merit based scholarships because that is what has worked for them for hundreds of years.

They attract the top students, have by far the largest endowments, and hell, they even have one decent basketball team this year.

Attributing any sort of capitalist economic model to the way that top schools work is missing the point. They simply do not work that way. Try the CEC schools or University of Phoenix if you want to see a school operated as a for-profit business.

Top schools are more like giant charity non-profits who have research as a side business and undergraduates as a recruiting system for donations.

lelnet said...

"Attributing any sort of capitalist economic model to the way that top schools work is missing the point. They simply do not work that way."

No, they're more like the mob.

"Need-based aid only" is a euphamism for "the cost of an education here is determined by turning your children upside down and shaking until all the money falls out, then taking all of it, and then doing the same for the parents, leaving only enough left over to pay for the tuition of their other kids already in college".

Imagine buying a car this way. You go to the dealer. He tells you "the cost of any car on our lot is $200 million. But we have a generous financial aid program, and if you'll just disclose your entire financial condition so we can see how much you can afford to contribute, I'm sure my manager and I can manage to find the aid money _somewhere_ to get you over the hump and into that car." Then, many hours of "negotiation" later, you hand over every cent you have in the world, sign a promissory note for, say, $90 thousand, and drive off the lot in your new Chevy Aveo (current MSRP in our world is $11,965), which breaks down on the way back to your house. When you arrive home, you find that the bill collectors are already calling about that loan...

This is what paying for college is, thanks to "need-based aid".

It's a scam. It's a way for the colleges to bend you over the table, and convince you to thank them for the privilege.

And any merit-based aid package undermines the perceived validity of this system, because for merit-based aid to be meaningful in your decision-making process, you have to start with the assumption that the stated price of attendance is the _actual_ price of attendance, which must be either paid by the family or else made up in some other way by the student's efforts.

Anonymous said...

Need based aid is nothing but socialism in action and that is one of the main reasons for tuition fees sky rocketing. Rob the rich and pay the poor. Everyone knows but doesnt want to talk about