Alchian-Allen Effect in Higher Education
By Joshua Hall
The Alchian-Allen Theorem states that when there are two substitute goods of differing quality and a fixed per unit amount is added to the cost of the product, consumption will shift towards the higher quality good as it is relatively cheaper. The Alchian-Allen Theorem is sometimes colloquially know as “shipping the good apples out” since the original example used by Armen Alchian and William Allen involved a question related to why all the good apples in Washington State ended up in New York. Once a fixed transportation cost is added, good apples become relatively cheaper in New York and thus are in higher demand. Although the good is flowing in the wrong direction, it seems like higher education is a case of “shipping the good apples out” since parents seem to substitute for quality higher education institutions if they are sending their kids far away. This explains, for example, why students from Alaska who attend school in Wisconsin seem to be well above the median.