Administrative vs. Allocative Efficiency

This fall marks my final semester of coursework, and penultimate semester overall, of the master’s course in industrial engineering here at Seoul National University. I’m taking courses in combinatorial optimization and advanced microeconomics, as well as continuing my study of college admissions markets as a research assistant in the Management Science/Optimization Lab.

Recently, I have been focusing on risk-averse behavior in college applications. In an ideal universe, college applications are completely standardized and there are no constraints on students’ ability to apply to many schools or on schools’ ability to assess a large number of applicants. In reality, many highly qualified students fail to apply to top schools because they doubt their ability to get in or receive a sufficient financial-aid package. For these students, the time and money required to submit an additional application to a so-called reach school takes away from time that could be spent refining an application to a target school. This opportunity cost is not trivial, because modern admissions offices strongly prefer students who tailor their personal statement to the characteristics and interests of the target school or program.

In Korea, such strategic behavior is baked into the college admissions process at the policy level: No student may apply to more than six colleges in a given year, and colleges are allowed to adopt more generous admissions standards for students who list the college as their first choice. A student who wishes to apply to a top university therefore needs more than just confidence in her academic talent; she must also be willing to accept the risk of being rejected and ending up at the bottom of the pile at her second choice.

We know, however, that risk aversion is not homogeneous across the population. Some of the variance is just temperamental: There are people who will continue working at an unsatisfying job because they fear that whatever job they switch to will be even worse, and there are other people who happily take the leap (paywall). But some of the variance in risk aversion is correlated with demographic traits. For example, all other things being equal, women are less likely than men to guess randomly on a hard multiple-choice test like the SAT that penalizes wrong answers (paywall). And we know that kids from low-income backgrounds tend to fail the marshmellow test; perhaps it is not stunted patience, but deliberate, risk-mitigating behavior that makes them favor the sure bet.

In college admissions, administrative efficiency requires any practical admissions procedure to put up some minimal barriers to application; otherwise, truly underqualified students will spam top universities with vain applications, wasting everyone’s time. However, if the application barriers are too high, they may force marginally admissible students—that is, qualified students—to engage in strategic behavior that does not reflect their actual preferences or abilities. A highly qualified, risk-averse student may list her second choice as her first, or neglect to apply early decision to her dream school (early decision increases admissions likelihood but arguably entails financial risk). And as a result, a less qualified but more cocksure student can step into her place.

The scenario above—which, to be clear, is speculative—suggests that market features designed to produce administrative efficiency, like requiring students to express a specific interest in their target school or indicate whether the school is their top pick, trade off with allocative efficiency in the composition of top universities’ entering classes. Moreover, if the psychological findings above on risk-averse decisionmaking also hold with respect to applicant behavior, then it is possible that the social cost falls most heavily on precisely the marginal groups whom we are trying hardest to recruit.