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Efficient Tuition & Fees, Examinations, and Subsidies

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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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Bibliographic Info

Paper provided by Institut d'economie publique (IDEP), Marseille, France in its series IDEP Working Papers with number 0501.

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Length: 29 pages
Date of creation: 01 Mar 2005
Date of revision: 01 Mar 2005
Handle: RePEc:iep:wpidep:0501

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Keywords: Tuition Fees; Examinations; State Subsidies; Higher Education; Incomplete Information.;

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  1. Borooah, Vani K, 1994. " Modelling Institutional Behaviour: A Microeconomic Analysis of University Management," Public Choice, Springer, vol. 81(1-2), pages 101-24, October.
  2. Fernandez, Raquel & Gali, Jordi, 1999. "To Each According to . . . ? Markets, Tournaments, and the Matching Problem with Borrowing Constraints," Review of Economic Studies, Wiley Blackwell, vol. 66(4), pages 799-824, October.
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Citations

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Cited by:
  1. Gianni De Fraja & Paola Valbonesi, 2009. "The Design of the University System," Discussion Papers in Economics 09/19, Department of Economics, University of Leicester.
  2. Alexander Kemnitz, 2007. "University Funding Reform, Competition, and Teaching Quality," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(2), pages 356-378, June.
  3. Beath, John & Poyago-Theotoky, Joanna & Ulph, David, 2011. "University funding systems: impact on research and teaching," Economics Discussion Papers 2011-1, Kiel Institute for the World Economy.
  4. Hugo Harari-Kermadec & David Flacher, 2011. "Tuition fees, self-esteem and social heterogeneity," Post-Print hal-00566151, HAL.
  5. McKenzie, Tom & Sliwka, Dirk, 2010. "Universities as Stakeholders in their Students' Careers: On the Benefits of Graduate Taxes to Finance Higher Education," IZA Discussion Papers 5330, Institute for the Study of Labor (IZA).
  6. 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.

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