SMU SOE Seminar Series (August 27, 2026): Optimal Education Design

TOPIC:

ABSTRACT

This paper studies the optimal design of education. We model education as an endogenous institution through which a social planner designs incentive-compatible matching paths. These paths jointly determine workers’ educational allocations and the information transmitted to firms, while inducing human capital investment. The resulting problem exhibits a dual non-monotonicity arising from the feasibility constraints and the social welfare function. Their interaction generates a single-peaked reduced-form problem and a virtual cost of human capital that incorporates both marginal and inframarginal education costs. We show that the optimal mechanism is partially informative and strictly dominates both full separation and pooling, providing a new mechanism-design rationale for overeducation.

Keywords: Job Market, Grand Mechanism, Information Design, Mechanism Design.

JEL: C72, D44, D82.

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