Macroeconomic implications of competitive college admissions

We present a public higher education model in which there exist indivisibilities in educational investment. Consequently, when demand for educational services exceed supply, a screening mechanism, which may potentially be imperfect, is required to choose the student body. We demonstrate how distortions or biases in screening--caused by parental factors--interact with the distribution of income to help explain the considerable differences across countries in the share of resources devoted to public higher education. Moderate degrees of admission bias lower the share of resources devoted to public education whereas higher levels of bias may have positive effects on public education supply. Thus, while lower screening biases lead to a better allocation of a given amount of spending on education, they do not necessarily lead to more political support for public education, and thereby to higher aggregate human capital and output. When wage rates are endogenous, the effects of screening biases on public higher education supply can be positive even for smaller biases. Moreover, higher inequality will lead to a lower share of resources devoted to public higher education when biases are relatively moderate.