DP16544 Do Peer Preferences Matter in School Choice Market Design? Theory and Evidence

Author(s): Natalie Marie Bachas, Ricardo Fonseca, Bobby Pakzad-Hurson
Publication Date: September 2021
Keyword(s): College Admissions, market design, Peer Preferences
JEL(s): C78, D47, I21
Programme Areas: Organizational Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16544

Can a clearinghouse generate a stable matching if it does not allow students to express their preferences over both programs and peers? Theoretically, we show that a stable matching exists with peer preferences under mild conditions, but finding one via canonical mechanisms is unlikely. We show that increasing transparency about the previous cohort of students enrolling at each program induces a tâtonnement wherein the distributions of former students play the role of prices. We theoretically model this process and develop a test for match stability. We implement this test empirically in the college admissions market in New South Wales (NSW), Australia, where we find evidence for the existence of peer preferences. We show that the NSW market fails to converge over time, and that this instability especially affects low socioeconomic status students. To address these issues, we propose a new mechanism that improves upon the current design, and we show that this mechanism generates a stable matching in the NSW market.