When Investor Incentives and Consumer Interests Diverge: Private Equity in Higher Education — by Charlie Eaton, Sabrina Howell, Constantine Yannelis

When Investor Incentives and Consumer Interests Diverge: Private Equity in Higher Education — by Charlie Eaton, Sabrina Howell, Constantine Yannelis

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When Investor Incentives and Consumer Interests Diverge: Private Equity in Higher Education

NBER Working Paper No. 24976
Issued in August 2018
NBER Program(s):Corporate Finance, Economics of Education, Labor Studies, Productivity, Innovation, and Entrepreneurship

This paper uses private equity buyouts to study a transition from lower- to higher-powered profit-maximizing incentives in higher education, a sector heavily dependent on government subsidy. Private equity owners have especially high-powered incentives to maximize profits. In a subsidized industry, this could intensify focus on capturing government aid at the expense of consumer outcomes. Employing novel data on 88 private equity deals and 994 schools with private equity ownership, we find that private equity buyouts lead to higher enrollment and profits, but also to lower education inputs, higher tuition, higher per-student debt, lower graduation rates, lower student loan repayment rates, and lower earnings among graduates. Neither changes to the student body composition nor a selection mechanism fully explain our results. In a series of tests exploiting regulatory events and thresholds, we find that private equity-owned schools are better able to capture government aid.

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Document Object Identifier (DOI): 10.3386/w24976

PublishFinancevia National Bureau of Economic Research Working Papers https://ift.tt/1j89DVYSeptember 3, 2018 at 03:32PM https://ift.tt/1aNsfVT https://ift.tt/1j89DVY https://ift.tt/2LUyhg0

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