The optimal ability-education mix and the misallocation of resources within education magnitude for developing countries

Abstract

The central notion of this paper is the hypothesis of factor complementarity between preschool ability and schooling in determining labor productivity. Hence, an optimal allocation of existing educational resources across students with different abilities ought to induce a positive and perfect correlation between ability and schooling. A system where schooling is determined by factors other than ability (i.e., the selection process of that system) induces a misallocation of present resources in education. An analytical framework is specified to derive magnitudes of the economic cost of this misallocation. It is shown that these values are substantial when compared to the welfare cost of other types of resource misallocation in developing countries.