The Price of Admission: Who Gets into Private School and How Much Do They Pay?

Abstract

This paper uses mechanism design theory to analyze how elementary and secondary private schools decide which students to admit from their applicant pool when wealth is private information. The problem for an individual private school of who to admit and how much to charge in tuition, is complicated by the existence of peer-effects: the value students place on attending school is increasing with the average ability of the entire class at that school. This feature, coupled with the fact that students can always attend public school for free, places constraints on the types of classes the private school can admit. An incentive compatible allocation rule which admits only high ability students violates the private school's operating constraint, while an allocation rule which admits only on the basis of wealth violates student participation constraints. Recognizing the costs associated with verifying wealth type can assist in explaining the structure of tuition contracts between students and private schools.

This article has been accepted for publication in the Economics of Education Review.

Keywords: Private schools, admissions, tuition, mechanism design

JEL Classification: D02, D21, D82, I22, I23