Purchasing Seats for High School Admission and Inequality

Abstract

Many Chinese cities once gave students the option of paying higher tuition to attend their preferred schools. This seat-purchasing mechanism is neither strategy-proof nor stable. Our paper combines administrative and survey data to estimate students' preferences and conduct welfare analysis. We find that changing from a deferred acceptance mechanism to the so-called cadet-optimal stable mechanism reduces students' welfare but that adopting the observed seat-purchasing mechanism alleviates this welfare loss. Under the latter approach, upper-tier schools collect significantly more tuition --- with a minimal change in student quality --- whereas collecting more tuition results in middle-tier schools facing substantial uncertainty about student quality.

Keywords: Market Design, School Choice, High School Admission, Matching with Contracts

JEL Classification: D40, I20