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Description:
We investigate the choice of quality, or academic content, in higher education in a two-sector model. Individuals are differentiated according to their cost of acquiring human capital. A higher academic quality increases productivity upon training, but is also associated with higher cost of acquiring skill. We consider both a differentiated university system in which quality is tailored to the individual need, and a uniform quality system being politically determined. The former yields a higher income dispersion. Average quality decreases under both systems when the skill premium increases. Moving from a single stage to a two-stage scheme reduces quality in the first stage and increases quality in the second stage. Increasing differentiation in higher education can decrease student effort and skill of medium ability types.