Efficient Tuition Fees, Examinations, and Subsidies

39 Pages Posted: 3 Jun 2004

See all articles by Robert J. Gary-Bobo

Robert J. Gary-Bobo

CREST ENSAE; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Alain Trannoy

National Center for Scientific Research (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS)

Date Written: May 2004

Abstract

We assume that students can acquire a wage premium, thanks to studies, and form a rational expectation of their future earnings, which depends on personal ability. Students receive a private, noisy signal of their ability, and universities can condition admission decisions on the results of noisy tests. We assume first that universities are maximizing social surplus, and contrast the results with those obtained when they are profit maximizers. If capital markets are perfect, and if test results are public knowledge, then the optimal tuition fee is greater than marginal cost, and there is no sorting on the basis of test scores. Students optimally self-select as a result of pricing only. If capital markets are perfect but asymmetries of information are bilateral, i.e., if universities observe a private signal of each student's ability, or if there are borrowing constraints, then the optimal policy involves a mix of pricing and pre-entry selection on the basis of test scores. Optimal tuition can then be set below marginal cost, and can even become negative, if the precision of the university's private assessment of students' abilities is high enough.

Keywords: tuition fees, examinations, state subsidies, higher education, incomplete information

JEL Classification: H42, I22, J24, D82

Suggested Citation

Gary-Bobo, Robert J. and Trannoy, Alain, Efficient Tuition Fees, Examinations, and Subsidies (May 2004). CESifo Working Paper Series No. 1189. Available at SSRN: https://ssrn.com/abstract=551424

Robert J. Gary-Bobo (Contact Author)

CREST ENSAE ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France
+33141176031 (Phone)

HOME PAGE: http://www.crest.fr/ses.php?user=3042

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Alain Trannoy

National Center for Scientific Research (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) ( email )

54, boulevard Raspail
Paris, 75006
France

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