On the role of borrowing constraints in public and private universities' choices

We investigate the reasons why universities use different combinations of fees and exams to guide admission decisions, focusing on the role of borrowing constraints on such decisions. On the one hand, we show that public universities choose exams and zero fees under borrowing constraints because exams are efficient allocation devices, and the objective of public institutions is the maximization of surplus. On the other hand, private universities prefer the use of fees to guide admission policies since tuition fees are not only an allocation device but also a source of revenues. Interestingly, we find that while borrowing constraints do not affect quality and admission standards in the public university, they reduce both quality and fees in the private.