Education and Borrowing Constraints: Tests vs. Prices

34 Pages Posted: 17 Aug 2000 Last revised: 9 Oct 2010

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: June 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 analyzed 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.

Suggested Citation

Fernández, Raquel, Education and Borrowing Constraints: Tests vs. Prices (June 1998). NBER Working Paper No. w6588. Available at SSRN: https://ssrn.com/abstract=226312

Raquel Fernández (Contact Author)

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

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

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