Ability tracking or comprehensive schooling? A theory on peer effects in competitive and non-competitive cultures

- We develop a model of student effort choice including reference dependent preferences to model peer effects.
- We contrast competitive and non-competitive cultures to show that the optimal school design depends on the culture.
- We show that comprehensive schooling maximizes average performance in competitive cultures and ability tracking in non-competitive cultures.
- Segregation of abilities always leads to a higher dispersion of performances.

We develop a model of student decision making that shows that it depends on the culture of competitiveness in a country or region whether it is optimal to choose a school design with ability tracking or comprehensive schooling. Students with different cultural background differ in their concern for relative position in the classroom, which is modeled by reference-dependent preferences. We contrast competitive cultures, where students compare their performance with the best performance in class, and non-competitive cultures where the reference point is the average performance. Taking into account students with heterogeneous abilities, we show that the average performance in competitive cultures is maximized under comprehensive schooling and in non-competitive cultures under ability tracking. Segregation of abilities, however, always leads to a higher dispersion of performances.