Preference Formation and Peer Effects in University Admission: The Further Deferred Acceptance

• Applicant: Professorin Dr. Dorothea Kübler
• Subject Area: Economic Policy, Applied Economics
• Term: from 2015 to 2018
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 264625991

Market design has been one of the most successful fields of economics in terms of how research has improved practices in real life. As a recognition, the 2012 Nobel Prize in Economics was awarded to Alvin Roth and Lloyd Shapley "for the theory of stable allocations and the practice of market design". However, many unresolved research questions and practical problems remain. This research aims to advance our understanding of market design for university admission by focusing on two open questions. First, it is typically assumed that students can form a preference ranking of all universities at no cost. Second, the literature mostly does not allow for externalities such as peer effects. Unfortunately, both assumptions are unlikely to be satisfied in real applications. For example, students usually choose from a large set of options about which they have limited information, and thus have difficulties to formulate a full preference ranking. Also, students may prefer to study close to where their friends are admitted to university.A new mechanism that was recently introduced in Germany addresses the problems that can arise when the standard assumptions do not hold. Our project investigates this mechanism which is a variant of the Deferred-Acceptance (DA) mechanism (Gale and Shapley, 1962). Due to its desirable theoretical properties such as stability and strategy-proofness, the DA has been at the very center of market design, and it has been adopted in numerous educational settings such as school choice in Boston, New York City, and Paris. In contrast to the DA, the German mechanism has two important features: First, students in the system "apply to" a set of universities and are only required to rank them after universities make first-round offers. Second, students may receive multiple first-round offers and can decide which one to keep. Compared with the DA, the ranking decision and the acceptance/rejection of first-round offers are further deferred. Hence, we call it the Further-Deferred-Acceptance (FDA) mechanism. We build a model to illustrate that the FDA dominates the DA in terms of student welfare if preference formation is costly and/or peer effects exist. Both ingredients of the model are non-standard in the literature. To empirically test these assumptions, we use survey, administrative, and experimental data. The performance of the FDA relative to the DA will also be evaluated quantitatively by counterfactual analyses, i.e. by simulating outcomes under both mechanisms based on estimated preferences.This project will investigate a market design solution when applicants are uncertain about their preferences and when preferences are affected by peers. Our project will provide evidence on the conditions under which the FDA dominates the DA, using both theory and data. Given the low cost of switching from the DA to the FDA, this can be an option in many real-life contexts.

• DFG Programme: Research Grants
• International Connection: France
• Co-Investigator: Professor Dr. Yinghua He