The Supply of Education Quality in a Spatial Model with Asymmetric Moving Costs

The paper analyses the characteristics of the supply of higher education in different geographical macroareas using a strategic interaction framework. It focuses on universities operating in centralised funding system that autonomously set the quality of education showing that in equilibrium it is inversely related to students' moving costs across areas. We show that in the presence of asymmetric information about workers' ability and asymmetric costs of moving, the only PBE consistent with forward induction involves that only high ability workers acquire education and the quality of education is lower in macroareas where the moving costs are higher. Our model predicts that in economies with centralised university funding, educational policies must be regulated according to the specific socioeconomic characteristics of the area. Direct subsidies to universities may be ineffective in improving the quality of education in the less developed areas. When regional disparities are not too big, efficiency gains may be obtained by reducing moving costs.