Higher education, elite institutions and inequality

We develop a model of higher education to analyze the effects of elite institutions on individual educational decisions and aggregate labor market outcomes. Elite institutions allow the most talented of a given population to separate themselves from the larger pool of agents enrolled in higher education, and to earn the associated wage premium in the labor market. As elite institutions engage in cream skimming, the returns to publicly accessible education decrease, and enrollment in public higher education declines. The resulting effect on income inequality is ambiguous, since elite education increases income dispersion at the top of the income distribution, and decreases income dispersion at the bottom.