We analyze a Massachusetts merit aid program in which high-scoring students received tuition waivers at in-state public colleges with lower graduation rates than available alternative colleges. A regression discontinuity design comparing students just above and below the eligibility threshold finds that students are remarkably willing to forgo college quality for relatively little money and that marginal students lowered their college completion rates by using the scholarship. These results imply that college quality has a substantial impact on college completion rates and that students likely do not understand this fact well. The theoretical prediction that in-kind subsidies of public institutions can reduce consumption of the subsidized good is shown to be empirically important.
Cohodes, Sarah, and Joshua Goodman. "Merit Aid, College Quality and College Completion: Massachusetts’ Adams Scholarship as an In-Kind Subsidy." HKS Faculty Research Working Paper Series RWP13-005, May 2013 (Revised from March 2013).