Race-conscious preferential admissions have been widely practiced by selective colleges and universities to enhance minority representation in higher education. For example, the College of Arts and Sciences at the University of Michigan automatically added 20 .points (out of a possible 150 points) to a minority applicant's score in its rating system. Harvard University has an "unofficial lift" scheme, which also targets minority applicants. However, controversy has surrounded affirmative action ever since its inception. For instance, California, Texas, and Florida have already terminated the use of race-conscious admissions at state-funded institutions. This debate culminated in the recent Supreme Court ruling regarding admissions procedures at the University of Michigan, which endorsed admissions rules that took into account race as a qualifying characteristic.
Unfortunately, positive studies on this issue have been scarce relative to the high profile of the debate. According to Holzer and Neumark (1999), theoretical studies of the efficiency of affirmative action on education are "virtually nonexistent." Some have argued that affirmative action is merely a patronage program and necessarily results in "mediocracy" rather than meritocracy. In the debate on affirmative action practices in college admissions, a major criticism is that affirmative action designed to create diversity comes at the cost of academic quality. A competing view, offered by those opposed to affirmative action, is that it weakens school applicants' incentives to achieve academic excellence. For instance, Justice Thomas wrote in his opinion in Grutter v. Bollinger that "there is no incentive for the black applicant to continue to prepare for the LSAT once he is reasonably assured of achieving the requisite score." Supporters of this practice tend to emphasize the importance of diversity and the positive influence of diversity on the pedagogical environment (Steele, 1990). These views, however, do not fully recognize the incentive structure behind affirmative action admissions rules. It is unclear how a college-admissions rule affects high school students' incentives to achieve academic excellence, which adds to their human capital stock and future productivity.
The process of college admissions by and large resembles a contest in which contestants exert costly effort in order to win a limited number of prizes. In the context of college admissions, to compete for a limited number of seats in the incoming class, college candidates have to present their academic credentials (such as GPA and SAT score) to the admissions officer. To win the seat, high school students have to invest in their human capital, which improves the academic performance, whereas the academic investments are costly and nonrefundable regardless of the outcome--for example, the tuition, the money spent on books, the salary paid to tutors, the time and energy, and so on. All of these features may be approximated by an all-pay auction mechanism.
We propose a simple theoretical framework that models the process of college admissions as an all-pay auction, to investigate two major questions: Is there any theoretical rationale for an affirmative action admissions rule? How do such rules affect college candidates' incentives to invest in academic effort? Two candidates--one a minority and the other a nonminority--simultaneously choose their academic efforts (human capital investments) to compete for a seat in a college. We show that an academic quality--oriented college prefers to adopt an admissions rule that scales up the test score of the minority relative to the nonminority. Although this rule is designed purely to maximize the expected academic quality of the incoming class, it turns out to favor the minority and create ethnic diversity. We show that the unique equilibrium (affirmative action) admissions rule creates a positive "cross-group interaction" between college candidates' incentives to make educational effort. …