Evaluating University Graduates: Prestige Versus Merit

ABSTRACT We study a game in which universities compete by making unobservable investments in education quality. Subsequently, the graduates are considered for a single placement by an organization. A merit‐based evaluator compares the realized skill of each graduate. A prestige‐based evaluator only observes a noisy signal of the universities' relative education quality. Though a prestige‐based evaluator does not know the true skills of the graduates, we derive conditions under which an increase in the probability of the prestige‐based evaluator incentivizes higher investment and benefits the organization.