DP10337 College Diversity and Investment Incentives

Author(s): Thomas Gall, Patrick Legros, Andrew Newman
Publication Date: January 2015
Keyword(s): affirmative action, education, matching, misallocation, multidimensional attributes, nontransferable utility, segregation
JEL(s): C78, I28, J78
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10337

This paper studies the aggregate economic effects of diversity policies such as affirmative action in college admission. If agents are constrained in the side payments they can make, the free market allocation displays excessive segregation relative to the first-best. Affirmative action policies can restore diversity within colleges but also affect incentives to invest in pre-college scholastic achievement. Affirmative action policies that are achievement-based can increase aggregate investment and income, reduce inequality, and increase aggregate welfare relative to the free market outcome. They may also be more effective than decentralized policies such as cross-subsidization of students by colleges.