Dynamic Adjustment in the U.S. Higher
Education Industry, 1955–1997
JOHN E. KWOKA, JR.
and CHRISTOPHER M. SNYDER
Department of Economics, Northeastern University, Boston, MA 02115, USA.
Department of Economics, George Washington University, Washington, DC 20052, USA.
Abstract. We analyze how the number of higher education institutions responds to demand
growth by applying a dynamic model to U.S. data over the period 1955–1997. We derive our
dynamic, partial adjustment model from ﬁrst principles under various assumptions about ﬁrm
behavior, ranging from proﬁt-maximization by Cournot ﬁrms to output-maximization by
non-proﬁt ﬁrms. Empirical estimates from this dynamic model suggest that the higher edu-
cation industry does indeed respond to demand growth, but only moderately in the short run
and little more in the long run. Certain segments within the overall industry exhibit much
stronger responsiveness in the short and long run, in particular, public and 2-year schools.
Keywords: Dynamic model, entry, higher education, partial adjustment
JEL Classiﬁcation: L11, I21, D21, C22.
Markets adjust to demand shocks through a combination of price and output
eﬀects. Output eﬀects, in turn, may take the form of increases in the size of
existing ﬁrms or increases in the number of producers as the result of entry.
Where the costs of expansion are substantial but entry is easy, the number of
suppliers can be expected to increase. Alternatively, where entry is subject to
signiﬁcant impediments but size is more readily adjusted, incumbent ﬁrm
expansion will dominate. If both expansion and entry are diﬃcult and costly,
price will rise to choke oﬀ a signiﬁcant part of increased demand.
We therefore expect each industry to respond to demand shifts with a
mix of entry and expansion speciﬁc to its underlying cost and behavioral
This paper models these adjustment dynamics explicitly and
Author for correspondence: Stigler Center for Study of Economics, University of Chicago,
1101 E. 58 Street, Chicago, IL 60637, USA. Tel.: +1-773-834-2686; Fax: +1-773-702-0458;
For analyses of the entry process, see, for example, Hall (1987), Dunne et al. (1988),
Kessides (1990), and Troske (1996). Summaries of the literature can be found in Siegfried and
Evans (1994) and Geroski (1995).
Review of Industrial Organization 24: 355–378, 2004.
Ó 2004 Kluwer Academic Publishers. Printed in the Netherlands.