Academia or the private sector? Sorting of agents into output-maximizing institutions

This paper develops an equilibrium sorting model with utility maximizing researchers who differ in their ability on one side of the market, and on the other side universities and an outside sector. In equilibrium, the top of the ability distribution is allocated to the academic sector, while the bottom of the ability distribution is allocated to the outside sector. For low values of the outside option, the academic sector is unaffected by it and exit from academia happens involuntarily. For higher values of the outside option, the academic sector is constrained by the outside sector and the universities are unable to satisfy their demands for researchers. In this case all exit from academia is voluntary and, furthermore, an increase in the value of the outside option decreases the difference in average quality between the higher and lower ranked universities.