The Real Deal? Information Asymmetries and Tuition Discounting in Higher Education

Most theoretical studies explain tuition discounting for high ability students through competition between colleges. This paper highlights an important and previously unrecognized avenue for tuition discounting - asymmetric information about student attributes, such as academic ability and willingness to pay. In our model, a college with incomplete information uses a tuition screen to infer student attributes from a costly signal, such as standardized test scores, elective coursework, community service record, extracurricular activities, etc. We find that the presence of information asymmetry can have profound effects on equilibrium behavior. Specifically, it can lead to some high ability students earning tuition discounts that they would otherwise not receive, other high ability students earning deeper discounts than they would otherwise enjoy, and, more generally, forms of tuition discounting that are inconsistent with symmetric information environments. Moreover, information asymmetry can sometimes be the sole reason that tuition discounting for high ability students manifests itself in any shape or form, even if the college faces no competitive pressure and high ability students may have a relative lack of financial need.