Subsidy and tuition policies in public higher education

Although public appropriations to higher education and tuition rates are set under alternative arrangements, the optimal allocation is readily achievable. The decentralized linear-subsidy case produces an externality that reduces joint welfare below the centralized (first-best) case, but when vertical constraints are added or bilateral bargaining occurs, tuition maximizes joint surplus. Specifications differ in the subsidy's assigned role, which varies from affecting tuition directly to being indeterminate under Nash bargaining. When marginal cost of education is nondecreasing, the ratio of nonresident to resident tuition declines with increases in the demand for education and with decreases in the state budget.