Education and Borrowing Constraints: An Analysis of Alternative Allocation Systems

Abstract

This paper compares the allocative properties of markets and exams in an environment in which students differ in wealth and ability and schools differ in quality. In the presence of borrowing constraints, exams are shown to dominate markets in terms of matching efficiency. Whether aggregate consumption is greater under exams than under markets depends on the power of the exam technology; for a sufficiently powerful test, exams dominate markets in terms of aggregate consumption as well. The effects of income taxation are analyzed and the optimal allocation scheme when wealth is observable is derived. The latter consists of allowing markets to set school prices but having the government allocate fellowships based both on financial need and exam score.

By Raquel Fernández
Published Mar. 23, 2015 11:20 AM - Last modified Oct. 5, 2021 10:31 AM