Higher Education: Reputation Effects, Signal Distortions, and Propitious Selection
We attempt to prove the hypothesis that, under certain conditions, a phenomenon of propitious selection may arise on the higher education market: When talented university entrants favor applying to branded universities, the latter are able to automatically build up a positive reputation without having to actually improve the quality of their educational process. We have performed an econometric modeling and regression analysis on a set of data that were obtained from a survey of Moscow university freshmen to show that high school graduates with high scores on the Unified State Exam (USE) really are oriented toward branded universities and that these prospective students believe that obtaining a prestigious degree is even more important than entering any particular profession. Entrants lack complete information about the quality of education at any given university. The analysis of university rankings presented in this article shows that they are unable to completely solve this information asymmetry since they contain signal distortions introduced by their ranking methodology. These rankings primarily prioritize the research activity of faculty members, and they ignore their teaching performance and work with students. Therefore, often universities design their policies in such a way as to privilege the criteria that are used in rankings, and they focus on improving precisely these indicators at the expense of other considerations. As a result, branded universities are able to distinguish themselves from conventional higher education institutions not by actually providing higher quality educational services, but by selecting the best applicants and benefiting from the powerful peer effect of having these students study together. In this way, these universities can produce excellent graduates that ensure their positive reputation in the eyes of employers and at the same time increase their brand value by raising their position in the rankings.