In recent years, several US states have introduced college admission policies that reward local rather than global relative performance by guaranteeing admission to students graduating in the top N-percent of their high school. This column examines how these policies affected socioeconomic and ethnic segregation at both the university and high school levels in the state of Texas. While the policies did not replicate the level of diversity in universities seen under earlier affirmative action policies, they did lead to a reduction in the overall level of ethnic segregation in high schools.
We investigate whether a policy that bases college admission on relative performance at high school could modify in the aggregate the degree of segregation in schools, by inducing some students to relocate to schools that offer weaker competition. In a theoretical model, such high school arbitrage will occur in equilibrium and typically result in desegregating high schools, if schools are segregated with regards to socio-economic characteristics that are correlated with academic performance and race. This is supported by empirical evidence on the effects of the Texas Top Ten Percent Law, indicating that a policy designed to support diversity at the college level in fact achieved high school desegregation, uninten- tionally generating incentives for some students to choose schools strate- gically.
We study diversity policies such as affirmative action in college admission in the presence of local peer effects. If students are constrained in making side payments within peer groups, the free market allocation displays excessive segregation relative to the first-best, generating excessively disparate pre-college investments. Effective diversity policy must overcome market forces within as well as across college boundaries. Policies that engender diversity affect pre-college investment incentives. When based on achievement, policies can increase aggregate investment and income, reduce inequality, and increase aggregate welfare relative to the market outcome. They may also be more effective than student cross-subsidization by colleges.
We study an assignment with investment model to higlight a tradeoff between investment in human capital before (ex-ante system) and after (ex-post system) matching on the labor market. The ex-post system is better at coordinating investment within firms while the ex-ante system is better at reducing mismatches. We further show that the ability to transfer surplus within firms affects mismatches and the relative performance of the two systems. At high degrees of transferability they are equivalent but when transferability is very low the ex-post system outperforms the ex-ante system while with moderate transferability the reverse is true.
We compare the welfare and equity properties of two compensation rules for university professors; a laissez-faire policy where universities are free to discriminate between professors of different quality and an equity based compensation where wages must be equalised inside a university. In terms of matching inside universities, the laissez-faire equilibrium involves heterogeneity of types while the other policy leads to segregation. Laissez-faire is always more efficient in terms of surplus and total output. More surprisingly the ex-pst distribution of wages can be more unequal under the “equity based” compensation than under laissez-faire. This illustrates some possibly unintended consequences of well meaning policy makers’ and university administrators’ attempts to maintain equity.