Regulation in education

This paper analyses inefficiencies in community composition resulting from peer group effects in education. We depart from the existing literature in two essential ways. Firstly, we introduce heterogeneity between communities (one community is more productive than another if its school produces the same educational quality at lower cost), and secondly, we introduce informational asymmetries by assuming that education, in each community, is financed by local public funds and produced by a school which has private information about its cost when it is privatized.