This paper examines the divergence of interest between universities and state governments concerning standards for admitting in-state versus out-of-state students. States have an interest in using universities to attract and retain high ability individuals because they pay higher taxes and contribute more to economic development. Universities have an interest in their graduates being successful, but little interest in where students come from or where they go after graduation. We show that

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... rsities have an incentive to set equal admissions cutoffs for marginal in-state versus out-of-state students, but states have an interest in universities favoring in-state students. We test the model for public and private universities and find that public universities favor instate students in admissions much more strongly than private universities do. We also find that attending a public university increases a marginal in-state student's probability of locating in the state after graduation by more than it increases marginal out-of-state students' probability of locating in the state. However, marginal in-state students earn less than marginal out-of-state students as adults and therefore pay less in state taxes. Because the former effect more than offsets the latter, states gain financially when public universities admit a marginal in-state rather than outof-state student. But an offsetting factor is that out-of-state students pay higher tuition than in-state students. This loss in tuition revenue more than offsets the gain in future state tax payments when a marginal in-state student substitutes for a marginal out-of-state student. We repeat the analysis for middle and high ability students in order to check whether state governments would gain by imposing a maximum as well as a minimum cutoff for admission. The results show that when a high ability in-state student substitutes for a high ability out-of-state student, the state gains more in expected future state tax revenues than it loses in foregone tuition revenue. Pennsylvania State University Private Institutions [26] Universities [15] Liberal-Arts Colleges [11]