School Choice and Loss Aversion

Abstract

Evidence suggests that participants in direct student-proposing deferred-acceptance mechanisms (DSPDA) play dominated strategies. To explain the observed data, we introduce expectation-based loss aversion into a school-choice setting and characterize choice-acclimating personal equilibria in DSPDA. We find that non-truthful preference submissions can be strictly optimal if and only if they are top-choice monotone. In equilibirum, DSPDA may implement allocations with justified envy. Specifically, it discriminates against students who are more loss averse or less confident than their peers, and amplifies already existing discrimination. To level the playing field, we propose sequential mechanisms as an alternative that is robust to these biases.

--This paper is superseded by "Loss aversion in strategy-proof school-choice mechanisms," but without the result on dynamic mechanisms, Proposition 4--

Keywords: Market design, Matching, School choice, Reference-dependent preferences, Loss aversion, Deferred acceptance

JEL Classification: C78, D47, D78, D81, D82, D91