School Segregation and Outside Options

ABSTRACT We study an allocation problem in which students share school preferences but differ in their outside options. We examine the ex‐ante Pareto efficient (and weakly fair) allocations. Their main qualitative property is positive sorting; students with higher outside options are assigned to better schools. This result points out the tension between the policy goals of desegregation and efficiency and cautions policymakers about the difficulty of aligning these two objectives.