Education and Borrowing Constraints: Tests vs. Prices

CEPR Discussion Paper Series Number 1913

Posted: 29 Sep 1998

See all articles by Raquel Fernández

Raquel Fernández

New York University - Leonard N. Stern School of Business, Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

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Date Written: July 1998

Abstract

This paper examines the properties of exams and markets as alternative allocation devices under borrowing constraints. Exams 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 positive effects of income taxation are analysed and the optimal allocation scheme when wealth is observable is derived. The latter consists of a fellowship scheme, in which markets set school prices but the government gives out fellowships, based on need and the ability to obtain a given exam score.

JEL Classification: D52, E44, J41

Suggested Citation

Fernández, Raquel, Education and Borrowing Constraints: Tests vs. Prices (July 1998). CEPR Discussion Paper Series Number 1913, Available at SSRN: https://ssrn.com/abstract=129028

Raquel Fernández (Contact Author)

New York University - Leonard N. Stern School of Business, Department of Economics ( email )

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