Motivation , resources and the organization of the school system ∗

We study a model where student effort 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 effort, which are partially compensated through school resources. In this way we provide a rationale for the ambiguous existing empirical evidence on the effect of school resources. We also provide a novel microfoundation for peer effects, with empirical implications on welfare and on preferences for sorting across schools. JEL-Classification: I20, I21, I28, J24 Key-words: education, incentives, school resources, parental involvement, school sorting, peer effects. ∗We thank Andrés Erosa, Esther Hauk, Elena Iñarra, Gilat Levy, Diego Puga, Miguel Urquiola, and seminar participants at University of Birmingham, Columbia University, LACEA, IMDEA and XIII Urrutia Elejalde Summer School on Economics and Philosophy. Albornoz is grateful for support from the ESRC (RES-062-23-1360), Cabrales acknowledges the support the Spanish Ministry of Science and Technology under grants CONSOLIDER-INGENIO 2010 (CSD2006-0016) and ECO2009-10531. †[email protected] ‡[email protected] §[email protected]