Abstract:-

We examine the problem faced by an educational authority tasked with setting a performance standard for a cohort of students who are heterogeneous along two dimensions — parental wealth and capacity for learning. Parents invest in the academic preparation of their children, and children exert effort to improve their performance. The introduction of a standard has two effects that can push in opposite directions. Conditional on preparation, the standard leads some students to raise effort and performance as they strive to meet it. But the standard can also lead to lower parental investment, by setting a floor for the resulting fall in performance. As a result, the introduction of a standard can reduce performance within some subgroups of a population. We show that parents will generally prefer standards that are binding on their children but lower than performance-maximizing, and that heterogeneity in the population can result in lower standards than would be faced by any homogeneous subgroup. 

(with Rajiv Sethi)