— Kieran Healy (@kjhealy) February 3, 2017
Grey Gordon and Aaron Hedlund create a sophisticated model of the college market and find that a large fraction of the increase in tuition can be explained by increases in subsidies.
With all factors present, net tuition increases from $6,100 to $12,559. As column 4 demonstrates, the demand shocks— which consist mostly of changes in financial aid—account for the lion’s share of the higher tuition. Specifically, with demand shocks alone, equilibrium tuition rises by 102%, almost fully matching the 106% from the benchmark. By contrast, with all factors present except the demand shocks (column 7), net tuition only rises by 16%.
These results accord strongly with the Bennett hypothesis, which asserts that colleges respond to expansions of financial aid by increasing tuition. Remarkably, so much of the subsidy is translated into higher tuition that enrollment doesn’t increase! What does happen is that students take on more debt, which many of them can’t pay.
In fact, the tuition response completely crowds out any additional enrollment that the financial aid expansion would otherwise induce, resulting instead in an enrollment decline from 33% to 27% in the new equilibrium with only demand shocks. Furthermore, the students who do enroll take out $6,876 in loans compared to $4,663 in the initial steady state….Lastly, the model predicts that demand shocks in isolation generate a surge in the default rate from 17% to 32%. Essentially, demand shocks lead to higher college costs and more debt, and in the absence of higher labor market returns, more loan default inevitably occurs.
Contract law scholars may be interested in a new paper, The Relational Economics of Commercial Contract, recently posted to SSRN by Chapin Cimino of Drexel Law School:
For almost half a century, the mainstream law-and-economics movement in contract law has zealously protected the parsimony – or simplicity – of economic analysis. The faith in ever-increasing formality is captured both by stubbornly spare assumptions about human behavior and tightly controlled econometric modeling. With few exceptions, the trend in most mainstream contract law scholarship – where the law-and-economic approach is dominant – has been toward excluding, not including, any variable which would capture the realities of actual contracting behavior. This trend has fueled the rise of neo-formalism in both contract theory and doctrine to the exclusion of other accounts.
At the same time, however, economic empiricists in other disciplines have been capitalizing on insights from sociology – insights almost as old as the law-and-economics movement itself – showing not only that, but also how, commercial actors in contemporary transactions rely on cooperative social behaviors common in everyday contracting. These behaviors, called relational norms, were originally identified by law-and-sociology professor Ian MacNeil as part of what is now called relational contract theory. Since the early 1990’s, economics scholars working mostly in the fields of marketing and strategic management have included relational norms as key variables in transaction cost analysis research. Strangely, though this work has clear implications for contract law and theory, this work has yet to be discussed in contract law literature. This article breaks new ground by introducing that work in contract law scholarship. The article shows how, contrary to received wisdom in law-and-economics, including relational behaviors in transaction cost research can improve, not detract from, the predictive power of economic analysis.
I think Cimino oversimplifies both the modern law and economics approach to contract as well as the reasons for some of its adherents’ attachment to formalism. For example, Cimino argues in the paper that:
For the past half-century, law and economics has played the dominant role in contracts scholarship. Scholars in this tradition value the prediction of behavior based on a cost-benefit analysis over the ability to precisely describe the world in which that behavior occurs.
Of course, that describes some contract scholarship in the law & econ tradition, but far from all of it, and even scholars making simplifying assumptions for the sake of modeling often have valid reasons for those assumptions – for example, to highlight and provide insights into a particular aspect of contracting behavior. And my own sense is that some of the law and economics scholars cited in the paper favor formalist approaches, not out of a vague attachment to simple predictive models, but because they believe it will lead to the most favorable results under real-world relational contracting conditions (such as sophisticated repeat players and informationally disadvantaged courts).
Nonetheless, the paper discusses in detail literature of which many contracts scholars may be unaware and argues for its relevance to current contract law debates, so be sure to read the whole thing here.
Interestingly, the call to turn to the nuance of sociology rather than to the simplicity of economics comes at a time when at least some sociologists are urging the opposite result. In Fuck Nuance, my co-author (on, coincidentally, a contract law paper), the sociologist Kieran Healy argues that:
Nuance is not a virtue of good sociological theory. Sociologists typically use it as a term of praise, and almost without exception when nuance is mentioned it is because someone is asking for more of it. I shall argue that, for the problems facing Sociology at present, demanding more nuance typically obstructs the development of theory that is intellectually interesting, empirically generative, or practically successful.
. . .
To take the most obvious example, it is traditional in Sociology to deride the way Economists work, depending as they do on an extremely pared-down model of human action. There is no less nuanced a character than Homo Economicus. While it is easy to snipe at theory on this basis, the strategy of assuming a can opener (as the old desert-island joke goes) turns out to be an unreasonably effective way of generating some powerful ideas.
But, of course, the best part of the paper is the abstract, which reads in its entirety: “Abstract: Seriously, fuck it.”
Clearly, the law professoriate needs to borrow from sociology its brevity and humor, if not its nuance.
My understanding is that the paper was a big hit at the 2015 American Sociological Association Meetings.