This paper presents a model of strategic competition between universities that accounts for the existence of positive spillover effect from education (peer effect). It was demonstrated that in the presence of peer effect strategic competition results in inefficient student allocation between the two universities (biased to the high-quality university) and excessive quality differentiation. The model is used to analyze the implications of government funding policies as well as admission and quality regulation. It was demonstrated that traditional schemes of institutional funding and students’ financial aid programs like tuition fee subsidy, quality investment subsidy, or total cost subsidy reduce social welfare. At the same time, an introduction of provision of tuition-free education for the best students combined with a per-student grant provided to the university improves both students’ and social welfare. It was also demonstrated that tight admission regulation is not socially desirable while the introduction of minimum quality standards makes society better off.

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Keywords Higher education, Peer effect, Strategic competition, Welfare
JEL Oligopoly and Other Forms of Market Imperfection (jel D43), Government Expenditures and Education (jel H52), Educational Finance (jel I22)
Persistent URL,
Journal Zhournal Novoi Ekonomicheskoi Associacii
Fridman, A.A. (A. A.), & Verbetskaia, M.A. (M. A.). (2020). Government regulation of the market for higher education. Zhournal Novoi Ekonomicheskoi Associacii, 45(1), 12–43. doi:10.31737/2221-2264-2020-45-1-1