Competition between State Universities

We analyse how state university competition to collect resources may a¤ect both the quality of teaching and research. By considering a set-up where two state universities behave strategically, we model their interaction with potential students as a sequential noncooperative game. We show that di¤erent types of equilibrium may arise, depending on the mix of research and teaching activity supplied by each university, and the mix of low and high ability students attending each university. The most e¢ cient equilibrium results in the creation of an élite institution attended only by high ability students. Low ability students are segregated in the other university, but obtain the same teaching quality level and pay the same tuition fees.