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Efficient Tuition & Fees, Examinations and Subsidies

Robert Gary-Bobo () and Alain Trannoy ()

No 5011, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: A student's future log-wage is given by the sum of a skill premium and a random personal ‘ability’ term. Students observe only a private, noisy signal of their ability, and universities can condition admission decisions on the results of noisy tests. We assume first that universities are maximizing social surplus, and contrast the results with those obtained when they maximize rents. If capital markets are perfect, and if test results are public knowledge, then, there is no sorting on the basis of test scores. Students optimally self-select as a result of pricing only. In the absence of externalities generated by an individual's higher education, the optimal tuition is then greater than the university's marginal cost. If capital markets are perfect but asymmetries of information are bilateral, i.e., if universities observe a private signal of each student's ability, or if there are borrowing constraints, then, the optimal policy involves a mix of pricing and pre-entry selection based on the university's private information. Optimal tuition can then be set below marginal cost, and can even become negative, if the precision of the university's private assessment of students' abilities is high enough.

Keywords: examinations; higher education; incomplete information; state subsidies; tuition fees (search for similar items in EconPapers)
JEL-codes: D82 H42 I22 J24 (search for similar items in EconPapers)
Date: 2005-04
New Economics Papers: this item is included in nep-edu and nep-pbe
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