Equilibrium Information Disclosure: Grade Inflation and Unraveling

The Economic Journal, 2006

College students are uncertain about whether they will be admitted at any given institution.

2005

Grading policy is a competition variable of universities, departments, and professors. Recently, empirical evidence on and public discussions about grade inflation and its negative consequence of making grades more noisy signals of true abilities have been widespread in academia and the media. We use a simple and stylized industrial economics model to examine incentives for grade inflation for a monopolistic university and for a duopoly of universities competing for students and funds. In particular, we examine both public and private universities and highlight the links between grading, university financing and competition between universities. We find strong incentives for upwardly distorted grades in all settings. Even public financing does not prevent universities from inflating grades as long as funding depends on the number of students and employers use grades as signals of productivity.

Games and Economic Behavior, 2008

SSRN Electronic Journal

This article explores the impact of procedural information on the behavior of applicants under two of the most commonly used school admissions procedures: the Gale-Shapley mechanism and the Boston mechanism. In a lab experiment, I compare the impact of information about the mechanism, information about individually optimal application strategies, and information about both. I nd that strategic and full information increase truth-telling and stability under the Gale-Shapley mechanism. Under the Boston mechanism, however, the adoption of equilibrium strategies remains unaected. Contrary to prevailing assumptions in matching theory, I show that the Boston mechanism improves perceived fairness. These results underscore the importance of procedural information and suggest that eliminating justied envy may not be a sucient condition of fairness.

2020

This paper investigates the determinants of college attrition in a setting where individuals have imperfect information about their schooling ability and labor market productivity. We estimate, a dynamic structural model of schooling and work decisions, where high school graduates choose a bundle of education and work combinations. We take into account the heterogeneity in schooling investments by distinguishing between two-, four-year colleges and graduate school, as well as science and non-science majors for four-year colleges. Individuals may also choose whether to work full-time, part-time, or not at all. A key feature of our approach is to account for correlated learning through college grades and wages, thus implying that individuals may leave or re-enter college as a result of the arrival of new information on their ability and productivity. We use our results to quantify the importance of informational frictions in explaining the observed school-to-work transitions and to ex...

SSRN Electronic Journal

Competitive screening and information transmission by Inácio Bó and Chiu Yu Ko * We consider a simple model of the competitive screening of students by schools and colleges. Students apply to schools which then perform costly screening procedures of the applicants to select those with high ability. Students who receive more than one offer may choose among those. Colleges select students and can observe the school which they attended. We show a channel through which students' preferences affect schools' screening decisions and outcomes: as schools increase the screening for high-ability students, a greater proportion of them is identified as such by multiple schools and are able to select one among them to attend. Schools' marginal gains from screening therefore depend on other schools' screenings and students' preferences. By focusing on the schools' screening choices (instead of the students' application decisions), we show how the competition for students between schools and colleges affect outcomes and students' welfare. We also show that, simply by observing which school a candidate attended, colleges can "free-ride" on the information produced by a fierce competition between schools for those students. Finally, we show that although colleges make full use of the information contained in the school a student attended, the extent to which students can improve the college that they are matched to by going to a (less desired) high-ranked school is fairly limited.

Proceedings of the Twenty-Sixth Annual ACM-SIAM Symposium on Discrete Algorithms, 2014

We present a mechanism for computing asymptotically stable school optimal matchings, while guaranteeing that it is an asymptotic dominant strategy for every student to report their true preferences to the mechanism. Our main tool in this endeavor is differential privacy: we give an algorithm that coordinates a stable matching using differentially private signals, which lead to our truthfulness guarantee. This is the first setting in which it is known how to achieve nontrivial truthfulness guarantees for students when computing school optimal matchings, assuming worst-case preferences (for schools and students) in large markets.

SSRN Electronic Journal, 2000

Market outcomes depend on the quality of information available to its participants. We measure the effect of information disclosure on market outcomes using a large-scale field experiment that randomly discloses information about quality in wholesale automobile auctions. As the theoretical literature predicts, information disclosure increases expected revenues. However, in contrast with conventional theories, the biggest gains are for the best-and worst-quality cars. We argue that information disclosure causes better matching of heterogeneous buyers to different quality cars. This novel explanation both rationalizes patterns in our data and is confirmed by additional tests. Our findings have implications for the design of other markets, including online consumer auctions, procurement auctions, and labor markets. JEL classifications C93, D44, D82, L15 * We are grateful to the management and employees of the firm that provided the data and worked cooperatively with us to implement the experiment. We thank Meghan Busse and Igal Hendel for helpful discussions, and many seminar participants for comments. Tadelis thanks the National Science Foundation for financial support.

Econometrica, 2006

We present an equilibrium model of the market for higher education. Our model simultaneously predicts student selection into institutions of higher education, financial aid, educational expenditures, and educational outcomes. We show that the model gives rise to a strict hierarchy of colleges that differ by the educational quality provided to the students. We also develop a new estimation procedure that exploits the observed variation in prices within colleges. Identification is based on variation in endowments and technology. It does not rely on observed variation in potentially endogenous characteristics of colleges such as peer quality measures and expenditures.

2004

In this paper we investigate the optimal choice of prices and/or exams by universities in the presence of credit constraints. We first compare the optimal behavior of a public, welfare maximizing, monopoly and a private, profit maximizing, monopoly. Then we model competition between a public and a private institution and investigate the new role of exams/prices in this environment. We find that, under certain circumstances, the public university may have an interest to raise tuition fees from minimum levels if it cares for global welfare. This will be the case provided that (i) the private institution has higher quality and uses only prices to select applicants, or (ii) the private institution has lower quality and uses also exams to select students. When this is the case, there are efficiency grounds for raising public prices.