Anti-Lemons: School Reputation and Educational Quality

48 Pages Posted: 30 Jun 2009 Last revised: 28 Jul 2009

See all articles by W. Bentley MacLeod

W. Bentley MacLeod

Columbia University - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Miguel S. Urquiola

Columbia University

Date Written: June 2009

Abstract

Friedman (1962) argued that a free market in which schools compete based upon their reputation would lead to an efficient supply of educational services. This paper explores this issue by building a tractable model in which rational individuals go to school and accumulate skill valued in a perfectly competitive labor market. To this it adds one ingredient: school reputation in the spirit of Holmstrom (1982). The first result is that if schools cannot select students based upon their ability, then a free market is indeed efficient and encourages entry by high productivity schools. However, if schools are allowed to select on ability, then competition leads to stratification by parental income, increased transmission of income inequality, and reduced student effort---in some cases lowering the accumulation of skill. The model accounts for several (sometimes puzzling) findings in the educational literature, and implies that national standardized testing can play a key role in enhancing learning.

Suggested Citation

MacLeod, William Bentley and Urquiola, Miguel S., Anti-Lemons: School Reputation and Educational Quality (June 2009). NBER Working Paper No. w15112. Available at SSRN: https://ssrn.com/abstract=1426748

William Bentley MacLeod (Contact Author)

Columbia University - Department of Economics ( email )

420 W. 118th Street
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National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics ( email )

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Miguel S. Urquiola

Columbia University ( email )

420 W. 118th Street
New York, NY 10027
United States

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