Andreas Bergh () and Günther Fink ()
Andreas Bergh: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Günther Fink: Bocconi University, Postal: Istituto di Economia Politica, Università Bocconi, Via Gobbi 5, 20136 Milano, Italy
Abstract: Private universities, as opposed to publicly financed ones, are dominant in some countries and almost non-existent in others. We develop a dynamic model to demonstrate that private providers emerge as soon as they can profitably sell an elite signal to the most highly talented. As private providers engage in cream skimming, the returns to publicly provided education decreases, but the average return to higher education increases because of the signaling benefit created. We use numerical simulations to demonstrate the dynamic implications of our model, and provide some basic empirical evidence in support of the theory presented
19 pages, January 11, 2005
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