With diminishing returns to the peer group, it is optimal social policy to mix chldren in schools. We consider what happens when, contrary to the outcome being determined by a social planner, schools and children are free to seek each other out: with some caveats, this leads to perfect segregation by child quality. It is shown that this is the worst possible outcome. We show also that a competitive system produces the optimal allocation of children to schools.
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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number
dp0312.
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