Efficient Tuition & Fees, Examinations and Subsidies

31 Pages Posted: 24 Aug 2005

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: April 2005

Abstract

A student's future log-wage is given by the sum of a skill premium and a random personal 'ability' term. Students observe only 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 maximize rents. If capital markets are perfect, and if test results are public knowledge, then, there is no sorting on the basis of test scores. Students optimally self-select as a result of pricing only. In the absence of externalities generated by an individual's higher education, the optimal tuition is then greater than the university's marginal cost. 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 based on the university's private information. 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: D82, H42, I22, J24

Suggested Citation

Gary-Bobo, Robert J. and Trannoy, Alain, Efficient Tuition & Fees, Examinations and Subsidies (April 2005). CEPR Discussion Paper No. 5011. Available at SSRN: https://ssrn.com/abstract=772727

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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