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Anti-Lemons: School Reputation and Educational Quality

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  • W. Bentley MacLeod
  • Miguel Urquiola

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.

Suggested Citation

  • W. Bentley MacLeod & Miguel Urquiola, 2009. "Anti-Lemons: School Reputation and Educational Quality," NBER Working Papers 15112, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:15112
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    Cited by:

    1. 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, January.
    2. Akyol, Metin, 2016. "Do educational vouchers reduce inequality and inefficiency in education?," Economics of Education Review, Elsevier, vol. 55(C), pages 149-167.
    3. Atuhurra, Julius F., 2016. "Does community involvement affect teacher effort? Assessing learning impacts of Free Primary Education in Kenya," International Journal of Educational Development, Elsevier, vol. 49(C), pages 234-246.
    4. Binelli, Chiara & Rubio-Codina, Marta, 2013. "The Returns to Private Education: Evidence from Mexico," Economics of Education Review, Elsevier, vol. 36(C), pages 198-215.
    5. 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, July.
    6. Sheetal Sekhri & Yona Rubinstein, "undated". "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.
    7. 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 234-263, July.
    8. 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.
    9. Akyol, Pelin & Krishna, Kala, 2017. "Preferences, selection, and value added: A structural approach," European Economic Review, Elsevier, vol. 91(C), pages 89-117.
    10. Giuseppe Bertola & Daniele Checchi, 2013. "Who Chooses Which Private Education? Theory and International Evidence," LABOUR, CEIS, vol. 27(3), pages 249-271, September.
    11. Saavedra, Anna Rosefsky & Saavedra, Juan Esteban, 2011. "Do colleges cultivate critical thinking, problem solving, writing and interpersonal skills?," Economics of Education Review, Elsevier, vol. 30(6), pages 1516-1526.
    12. Dante Contreras & Paulina Sepúlveda & Sebastián Bustos, 2010. "When Schools Are the Ones that Choose: The Effects of Screening in Chile," Social Science Quarterly, Southwestern Social Science Association, vol. 91(s1), pages 1349-1368.
    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).
    14. 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.
    15. 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..
    16. Derek Neal, 2010. "Aiming for Efficiency Rather Than Proficiency," Journal of Economic Perspectives, American Economic Association, vol. 24(3), pages 119-132, Summer.
    17. Cremer, Helmuth & Maldonado, Dario, 2013. "Mixed oligopoly in education," IDEI Working Papers 766, Institut d'Économie Industrielle (IDEI), Toulouse.
    18. 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.
    19. 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.
    20. Maria Marta Ferreyra, 2010. "Information Asymmetry and Equilibrium Monitoring in Education," 2010 Meeting Papers 1215, Society for Economic Dynamics.
    21. Kerstin Bruckmeier & Georg-Benedikt Fischer & Berthold U. Wigger, 2017. "Status effects of the German Excellence Initiative," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(3), pages 177-183, March.
    22. Christopher Avery & Parag A. Pathak, 2015. "The Distributional Consequences of Public School Choice," NBER Working Papers 21525, National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • I2 - Health, Education, and Welfare - - Education
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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