Assistant Professor of Education, Harvard University
While college enrollment has more-than doubled since 1970, elite colleges have barely increased supply, instead reducing admit rates. Blair and Smetters show that straightforward reasons cannot explain this behavior. They propose a model where colleges compete on prestige, measured as relative selectivity or admit rates. Higher demand decreases [increases] the admit rate if the weight on prestige is above [below] a critical value, consistent with experience in elite [non-elite] colleges. The calibrated model closely replicates the data while counter-factual simulations without prestige fail. This “prestige externality” is Pareto inefficient, with schools and students worse off, producing large welfare losses.