Arpita Patnaik, "Pricing, Income and College Major Choice"
Job talk. Arpita Patnaik is a Ph.D. candidate in Economics at the University of Wisconsin- Madison. She will present the paper "Pricing, Income and College Major Choice".
This paper studies the implications of short-term costs imposed by pricing structures on college major choice and the role of financial constraints. I examine the effect of major-specific pricing policies on major choice and on the distribution of low-income students across majors. Using rich student-level administrative data from the University of Wisconsin-Madison, I implement a difference-in-difference strategy that exploits the introduction of a surcharge policy in the Engineering and Business programs. I find that raising the program specific tuition by $1000 (11%) decreases the probability of graduating in Business by 33% and in Engineering by 12% and that this is driven by the response of low-income students. I then exploit this price variation to identify the labor market returns for these majors. Using these estimates, I find that students are highly responsive to prices despite large earnings losses from switching majors. Motivated by the empirical evidence, I develop and estimate a structural model of college major choice that quantifies the importance of direct price effects and credit constraints. The model estimates suggest that credit constraints rationalize the sensitivity of students to changes in pricing structures. Complementing price differentials with expansions of borrowing limits and means-tested subsidies can minimize the distortion created by pricing. Relaxing borrowing limits allows students to borrow against future income to pay higher tuition, and means-tested grants decrease the net price of the major for low-income students.
Host: Halvor Mehlum