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Efficient Tuition Fees and Examinations

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Author Info
Robert J. Gary-Bobo
Alain Trannoy

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Abstract

We assume that students observe only a private, noisy signal of their ability and that universities can condition admission decisions on the results of noisy tests. If the university observes a private signal of each student's ability, which is soft information, then asymmetries of information are two-sided, and the optimal admission policy involves a mix of pricing and pre-entry selection, based on the university's private information. In contrast, if all test results are public knowledge, then there is no sorting on the basis of test scores: Tuition alone does the job of implementing an optimal degree of student self-selection. These results do not depend on the existence of peer effects. The optimal tuition follows a classic marginal social-cost pricing rule. (JEL: D82, H42, I22, J24) (c) 2008 by the European Economic Association.

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File URL: http://www.mitpressjournals.org/doi/pdfplus/10.1162/JEEA.2008.6.6.1211
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Publisher Info
Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 6 (2008)
Issue (Month): 6 (December)
Pages: 1211-1243
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Handle: RePEc:tpr:jeurec:v:6:y:2008:i:6:p:1211-1243

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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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