Search and Biased Beliefs in Education Markets

This paper asks how search costs, limited awareness of schools, misperceptions of schools’ attributes, and inaccurate beliefs over unknown schools affect families’ search and application decisions in Chile’s nation wide school choice process. We combine novel data on search activity with a panel of household surveys, administrative application data, randomized information experiments, and a model of demand and sequential search with subjective beliefs. Descriptively, households hold inaccurate beliefs and misperceptions along multiple dimensions which distort the perceived returns to search. Most importantly, they do not know all schools, and misperceive quality ratings of the schools they know and like. Improving the search technology would raise households’ search effort and welfare. Correcting misperceptions about known schools’ observables would cause students to match to schools with higher quality, equal to what can be achieved under a full-information benchmark. Models with out misperceptions would incorrectly predict quality reductions.