More comments when I have some time ...
THE ECONOMICS OF ONLINE POSTSECONDARY EDUCATION: MOOCS, NONSELECTIVE EDUCATION, AND HIGHLY SELECTIVE EDUCATION
Highly Selective Postsecondary Education (HSPE)
In other studies, I model HSPE institutions as venture capitalists in advanced human capital because (i) they invest massively in each student whom they educate and (ii) they earn an equity-like return on their investments (Hoxby, 2012). That is, the HSPE institution itself covers the majority of the cost of a student's undergraduate education using donations from alumni. Even HSPE students who receive no financial aid pay for only some of the full cost of their education.
HSPE alumni donate a share of their perceived returns on the educational investment made in them, and most donations occur decades after graduation. Because HSPE alumni earn returns that exhibit a highly right-skewed distribution (in each classs, there are many alumni with solid professional careers but only a few Steve Jobs), it matters that donations are analogous to shares of returns and not to the repayment of a loan (the institution's investment plus some fixed rate of return).
It is crucial for understanding HSPE institutions' viability that they are modeled as investors, not as the sellers of a service. If an HSPE institution does not infuse value-added into students that is proportional to the institution's investment, alumni cannot pay the institution back later in life, no matter how much they wish to do so. Thus, at least on average, HSPE institutions' investments must earn returns or they will go bankrupt. Interestingly, the alumni who are the most generous donors are those who needed financial aid as students and who attribute their later success to the institution.6
Of course, this financing system only works if former students do in fact pay back the institution later in life. The methods by which HSPE institutions achieve this intergenerational virtuous circle are therefore crucial and discussed below. ...