The Macroeconomic Consequences of Competition for College Admissions

Abstract

<p>To study the role of competition for college admissions in driving parental investment and its implications for child development policies, we develop a heterogeneous-agent life-cycle model where parents invest in children’s human capital to compete for limited college seats. The human capital acquired for college admission, however, only partially converts into labor efficiency units. We show that the relative strength of the competition incentive depends crucially on the conversion rate, and provide a novel identification strategy to gauge the rate. Estimating our model with Chinese data, we find that more than 60% of parental investment is driven by the competition incentive on average, with a particularly large proportion for children with abilities near the admission threshold. Regulating competition through a private education investment tax balances curbing competition and minimizing human capital losses, improving welfare.<br></p>