Should College Admissions Favor Low-Income Applicants?

College admissions should also base their decisions on applicants' income as affirmative action targeting low-income applicants is a powerful policy to reduce intergenerational persistence of earnings and to improve both welfare and aggregate output. We construct an overlapping-generations model in which parents choose how much to invest in their child's education, thereby increasing both human capital and likelihood of college admission. Affirmative action improves the pool of admitted students, however it distorts incentives towards educational investments. Using the model at calibrated parameters, we quantify the long-run effects of optimal income-based affirmative action policies