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Anti-Lemons: School Reputation and Educational Quality

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  • MacLeod, Bentley

Abstract

Friedman (1962) argued that a free market in which schools compete based upon their reputation would lead to an efficient supply of educational services. This paper explores this issue by building a tractable model in which rational individuals go to school and accumulate skill valued in a perfectly competitive labor market. To this it adds one ingredient: school reputation in the spirit of Holmstrom (1982). The first result is that if schools cannot select students based upon their ability, then a free market is indeed efficient and encourages entry by high productivity schools. However, if schools are allowed to select on ability, then competition leads to stratification by parental income, increased transmission of income inequality, and reduced student effort---in some cases lowering the accumulation of skill. The model accounts for several (sometimes puzzling) findings in the educational literature, and implies that national standardized testing can play a key role in enhancing learning.

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Paper provided by Department of Economics, Institute for Business and Economic Research, UC Berkeley in its series Department of Economics, Working Paper Series with number qt3rc708kd.

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Date of creation: 01 Jul 2009
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Handle: RePEc:cdl:econwp:qt3rc708kd

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Cited by:
  1. Sergey V. Popov & Dan Bernhardt, 2013. "University Competition, Grading Standards, And Grade Inflation," Economic Inquiry, Western Economic Association International, vol. 51(3), pages 1764-1778, 07.
  2. Adrienne M. Lucas & Isaac M. Mbiti, 2014. "Effects of School Quality on Student Achievement: Discontinuity Evidence from Kenya," American Economic Journal: Applied Economics, American Economic Association, vol. 6(3), pages 234-63, July.
  3. Polona Domadenik & Dasa Farcnik, 2011. "Did Bologna reform improve school-to-work transition of graduates? Evidence from Slovenia," Investigaciones de Economía de la Educación volume 6, in: Antonio Caparrós Ruiz (ed.), Investigaciones de Economía de la Educación 6, edition 1, volume 6, chapter 40, pages 649-665 Asociación de Economía de la Educación.
  4. Mizala, Alejandra & Urquiola, Miguel, 2013. "School markets: The impact of information approximating schools' effectiveness," Journal of Development Economics, Elsevier, vol. 103(C), pages 313-335.
  5. Sheetal Sekhri & Yona Rubinstein, . "Do Public Colleges in Developing Countries Provide Better Education than Private ones? Evidence from General Education Sector in India," Virginia Economics Online Papers 375, University of Virginia, Department of Economics.
  6. Ferreyra, Maria Marta & Liang, Pierre Jinghong, 2012. "Information asymmetry and equilibrium monitoring in education," Journal of Public Economics, Elsevier, vol. 96(1), pages 237-254.
  7. Derek Neal, 2010. "Aiming for Efficiency Rather Than Proficiency," Journal of Economic Perspectives, American Economic Association, vol. 24(3), pages 119-32, Summer.
  8. Atila Abdulkadiroğlu & Joshua Angrist & Parag Pathak, 2014. "The Elite Illusion: Achievement Effects at Boston and New York Exam Schools," Econometrica, Econometric Society, vol. 82(1), pages 137-196, 01.
  9. Chiara Binelli & Marta Rubio Codina, 2012. "The returns to private education: evidence from Mexico," IFS Working Papers W12/08, Institute for Fiscal Studies.
  10. Li, Hongbin & Meng, Lingsheng & Shi, Xinzheng & Wu, Binzhen, 2012. "Does attending elite colleges pay in China?," Journal of Comparative Economics, Elsevier, vol. 40(1), pages 78-88.
  11. Maria Marta Ferreyra, 2010. "Information Asymmetry and Equilibrium Monitoring in Education," 2010 Meeting Papers 1215, Society for Economic Dynamics.
  12. Christian Ferreda & Matías Tapia, 2010. "Redistributive Taxation, Incentives, and the Intertemporal Evolution of Human Capital," Documentos de Trabajo 390, Instituto de Economia. Pontificia Universidad Católica de Chile..
  13. MacLeod, W. Bentley & Urquiola, Miguel, 2012. "Anti-Lemons: School Reputation, Relative Diversity, and Educational Quality," IZA Discussion Papers 6805, Institute for the Study of Labor (IZA).

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