General Equilibrium Treatment Effects: A Study of Tuition Policy

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This paper defines and estimates general equilibrium treatment effects. The conventional approach in the literature on treatment effects ignores interactions among individuals induced by the policy interventions being studied. Focusing on the impact of tuition policy, and using estimates from our dynamic overlapping generations general equilibrium model of capital and human capital formation, we find that general equilibrium impacts of tuition on college enrollment are an order of magnitude smaller than those reported in the literature on microeconomic treatment effects. The assumptions used to justify the LATE parameter in a partial equilibrium setting do not hold in a general equilibrium setting. Policy changes induce two way flows. We extend the LATE concept to a general equilibrium setting. We present a more comprehensive evaluation to program evaluation by considering both the tax and benefit consequences of the program being evaluated and placing the analysis in a market setting.

Published: American Economic Review, Vol. 88, no. 2 (May 1998): 381-386. Published as "Human Capital Formation and General Equilibrium Treatment Effects: A Study of Tax and Tuition Policy", FS, Vol. 20, no. 1 (March 1999): 25-40.

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