DP7964 | Incentives, resources and the organization of the school system

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We study a model where student e ort and talent interact with parental and teachers' investments, as well as with school system resources. The model is rich, yet sufficiently stylized to provide novel implications. We can show, for example, that an improvement in parental outside options will reduce parental and school eff ort, which are partially compensated through school resources. In this way we provide a rationale for the ambiguous existing empirical evidence on the e ffect of school resources. We also provide a novel microfoundation for peer e ffects, with empirical implications on welfare and on preferences for sorting across schools.