Income-based affirmative action in college admissions

We study whether college admissions should implement quotas for lower-income applicants. We develop an overlapping-generations model and calibrate it to data from Brazil, where such a policy is widely implemented. In our model, parents choose how much to investin their child’s education, thereby increasing both human capital and likelihood of college admission. We find that, in the long run, the optimal income-based affirmative action increases welfare and aggregate output. It improves the pool of admitted students but distorts pre-college educational investments. The welfare-maximizing policy benefits lower- to middle-income applicants with income-based quotas, while higher-income applicants face fiercer competition in college admissions. The optimal policy reduces intergenerational persistence of earnings by 5.7% and makes nearly 80% of households better off.