Quality Adjusted Net Price Indices for Four Year Colleges

Since the earlier 1980's the "sticker price" of a college education in the United States has, according to estimates from the Consumer Price Index (CPI), risen significantly faster than the overall rate of inflation. For the CPI, the government collects data on the "sticker price" of college (tuition and fees) without adjusting for scholarships given or other discounts. Further, no adjustments are made for changes in the quality or characteristics of the services provided, such as attributes of the faculty, the course offerings, or the facilities. Thus, the estimated price indices reflect changes in quality and characteristics of college as well as changes in prices. In this paper, we develop and explore the construction of a quality-adjusted price index for US colleges, based on the estimation of a hedonic model of the price of college. Our analysis indicates that estimating price indexes using hedonic methods is both feasible and useful.