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

• In Event: 2350 - Economic Sociology and New Mechanisms for the Production of Inequality

Abstract

In sectors with intensive government subsidy, such as education, infrastructure, and health care, short term profit maximizing incentives may not be aligned with customer interests. This paper studies the effect of private equity buyouts in the for-profit postsecondary education sector. Employing novel, hand collected data on 88 private equity deals and 1,332 school-level ownership changes, we find that private equity buyouts lead to expanded enrollment and higher profits, but also to higher per-student debt, lower graduation rates, lower loan repayment rates, and lower wages. The effects are driven by the top of the wage distribution drives the average effect. Our results may reflect selection, but we find operational changes that point to a treatment effect. Supporting a treatment channel, we show that following the expansion of federal credit limits for students, tuition and student debt at private equity owned schools rose faster than at other for-profit schools. The results indicate that superior capture of federal aid is an important channel through which private equity ownership translates to higher profits.

Authors

• Charlie Eaton, University of California-Merced

• Sabrina T. Howell, New York University

• Constantine Yannelis, New York University