an article by Robert J Gary-Bobo (Université Paris 1, Paris School of Economics) and Alain Trannoy (EHESS and GREQAM-IDEP) in Journal of The European Economic Association Volume 6 Number 6 (December 2008)
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.
© 2008 by the European Economic Association
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