State Higher Education Spending: A Spatial Econometric Perspective

This article uses spatial econometric modeling to estimate the extent to which state higher education spending in three categories (need-based aid spending, non-need-based aid spending, and appropriations to public universities) is affected by the spending decisions of neighboring states. Drawing on the relevant empirical and theoretical literature in public finance and economics, it evaluates three theoretically justified alternatives for defining the connectivity between states: physical proximity, relative population migration flows between states, and common state membership in regional interstate higher education compacts. Our empirical results find statistically significant geographical spatial interdependence in spending for need-based aid and higher education appropriations, but no equivalent effects for non-need-based aid. We discuss our results in the context of the continually evolving role of higher education in state budgets.