LAUSR

Abstract While the impact of a higher college wage premium on enrollment expansion is well understood, the link between university quality differentiation and student outcomes in this context has received less attention. To address this issue, we model different higher education systems. Academic standards decline in a differentiated, U.S.-type education system - as a low-quality segment emerges - but also in a system in which a uniform standard is politically determined, as in most European countries, since the interests of marginal students matter for the chosen standard. In the absence of full information about graduates' skills, employers put more weight on university reputation than on individual human capital signal. Thus, higher differentiation can decrease the effort and skill of medium-ability students. Obtaining the preferred academic standard is particularly important for high-and low-ability students, hence the trend toward more unequal societies raises political support for strongly differentiated systems.