UNIVERSITY ADMISSIONS: THE IMPORTANCE OF ‘OUTSIDE OFFERS' AS COLLEGES COMPETE FOR THE BEST PROSPECTIVE STUDENTS

When a prospective student applies to several different universities, how one of them evaluates the applicant can influence the admission offers made by the others. Students who receive and accept an improved offer complete their first year with better grades. These are among the conclusions of a study of US college admissions by Professor Dennis Epple and colleagues, published in the November 2006 issue of the Economic Journal .

Ever-increasing competition for good students means that colleges have to develop more effective admission strategies every year. Negotiation with admitted students over financial aid is one such policy used by some elite private colleges and universities in the United States. In this study, the researchers investigate the rationale underlying this and similar policies.

The negotiation process usually unfolds like this: a college evaluates a student's application, admits a student assessed to be sufficiently capable and offers a financial aid package. The admitted student then provides information about his or her offers from other institutions. In response, the college either improves its financial aid package or maintains the initial offer. The student then decides in which college to enrol.

The results of the study shed light on the dynamic nature of the admissions process, the role and implications of uncertainties faced by applicants and colleges, and how the latter use competing offers to gain information about the capabilities of the former.

Students apply to several universities because they are unsure about how their record will be evaluated and compared with other applicants. Colleges cannot perfectly predict a student's success based on the information in the application package. Additional information about the student's capabilities can be very useful and, the researchers argue, colleges use a student's alternative offers as additional sources of information.

The theoretical framework in the study posits that a college's initial financial aid offer to an admitted applicant reflects a college's best assessment of an applicant's capabilities based on the information available in the application. Outside offers then provide information about other institutions' independent assessments, which the college can combine with its own to produce a better forecast of student performance.

If the revised estimate of a student's capability improves, then the college increases the amount of financial aid on offer accordingly. The analysis explains why:

• not all students negotiate;
• not all students that negotiate receive more financial aid;
• some students receive substantially better offers as a result of negotiation;
• and students that negotiate do not necessarily enrol, even if they receive substantially improved financial aid packages.

The empirical analysis supports the theoretical predictions about the value and use of the information content of outside offers. The data include detailed information about alternative offers of applicants of a highly selective US university, in addition to all the standard information in the application files.

The empirical analysis indicates that improvements in financial aid offers are strongly related to the quality of an outside offer, including the ranking of the outside college and the amount of the competing financial aid offer. Also, the students who matriculate after receiving an improved offer complete their first year with higher grades on average, indicating the success of the policy.

ENDS

Notes for editors : ‘Profiling in Bargaining over College Tuition' by Dennis Epple, Richard Romano, Sinan Sarpca and Holger Sieg is published in the November 2006 issue of the Economic Journal .

Dennis Epple and Holger Sieg are at Carnegie Mellon University. Richard Romano is at the University of Florida. Sinan Sarpca is at Koc University.

For further information : contact Dennis Epple on +1-412-2681536 (email: epple@cmu.edu); or Romesh Vaitilingam on 07768-661095 (email: romesh@compuserve.com).