Association for Public Policy Analysis & Management

For more than 15 years, many Chinese cities gave students the option of paying higher tuition to acquire seats in their preferred schools. Yet real-world matching mechanisms that include an option to purchase seats may yield inefficient and unstable matching outcomes. This paper combines high school admission and survey data from China to estimate students' preferences regarding schools and tuition. The counterfactual experiments indicate that when the number of seats for sell is limited, the change from the deferred acceptance mechanism to the existing matching mechanism (with the seat-purchasing option) may have benefited moderately performing students while reducing the welfare of top students. Meanwhile, the upper-tier schools may benefit from the increase in tuition collection and no significant decline in student quality, but middle-tier schools face a significant trade-off between student quality and tuition. If the deferred acceptance mechanism is instead replaced by a strategy-proof "student optimal purchasing seats'' mechanism, then all student groups would experience a loss of welfare. At the same time, schools under the latter mechanism would collect significantly more tuition with only minimal change in the quality of admitted students.