Istanbul

This paper develops a differentiated products model of school competition that distinguishes among different dimensions that matter in the skill acquisition process. The model predicts that when schools compete for students, specialization may arise as a competition strategy. This will serve rich students well. Poorer students, however, may attend schools with specializations that do not cater to their relative talents. By doing so, these poorer students complement the weaknesses of the richer students through peer effects and receive financial aid in return. The empirical analysis provides strong support for the model’s predictions about within-school implications of specialization