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Efficient Tuition & Fees, Examinations and Subsidies

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Author Info
Gary-Bobo, Robert J.
Trannoy, Alain

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Abstract

A student's future log-wage is given by the sum of a skill premium and a random personal ‘ability’ term. Students observe only a private, noisy signal of their ability, and universities can condition admission decisions on the results of noisy tests. We assume first that universities are maximizing social surplus, and contrast the results with those obtained when they maximize rents. If capital markets are perfect, and if test results are public knowledge, then, there is no sorting on the basis of test scores. Students optimally self-select as a result of pricing only. In the absence of externalities generated by an individual's higher education, the optimal tuition is then greater than the university's marginal cost. If capital markets are perfect but asymmetries of information are bilateral, i.e., if universities observe a private signal of each student's ability, or if there are borrowing constraints, then, the optimal policy involves a mix of pricing and pre-entry selection based on the university's private information. Optimal tuition can then be set below marginal cost, and can even become negative, if the precision of the university's private assessment of students' abilities is high enough.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5011.

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Date of creation: Apr 2005
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Handle: RePEc:cpr:ceprdp:5011

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Related research
Keywords: examinations; higher education; incomplete information; state subsidies; tuition fees;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
I22 - Health, Education, and Welfare - - Education - - - Educational Finance
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. John Beath & Joanna Poyago-Theotoky & David Ulph, 2005. "University Funding Systems and their Impact on Research and Teaching: A General Framework," Discussion Paper Series 2005_2, Department of Economics, Loughborough University. [Downloadable!]
  2. Henk C. Kranendonk & Jan Bonenkamp & Johan P. Verbruggen, 2004. "A Leading Indicator for the Dutch Economy – Methodological and Empirical Revision of the CPB System," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  3. Buda, Rodolphe, 2009. "Learning-Testing Process in Classroom: An Empirical Simulation Model," MPRA Paper 12146, University Library of Munich, Germany. [Downloadable!]
  4. del Rey, Elena & Romero, Laura, 2004. "Prices versus Exams as Strategic Instruments for Competing Universities," Working Papers of the Department of Economics, University of Girona 12, Department of Economics, University of Girona. [Downloadable!]
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