What do universities do?

Do universities increase their students’ earnings by raising their human capital, or merely by signaling to employers that the individual has high ability? This old question might gain force if universities are able to freely choose tuition fees.
Imagine Oxford were to charge £10,000 a year whilst a less prestigious establishment charges £3,000. A student is then offered a place at Oxford. He might figure: “I'll reject this, and go to Cheap University instead. This way, I’ll save £21,000 over three years, but I’ll have the offer of an Oxford place to signal my high ability to employers. And hey, if I'm bright enough to get into Oxford, I'm bright enough to earn decent money anyway.” If the signaling hypothesis is correct, or nearly so, this would be quite rational. And US evidence suggests it is roughly correct; students who turn down places at elite universities and attend less esteemed establishments subsequently earn about the same as those who accepted the places.
So, why might this be a wrong choice? Three obvious possibilities are:
1. University is a consumption good, not just an investment good. Maybe Oxford offers a better consumer experience than Cheap University.
2. Getting through Oxford doesn’t just signal one’s intellectual ability. It also signals an ability to get on with other Oxford students - a soft skill which employers value. Conversely, going to Cheap University rather than Oxford signals that one has a chip on one’s shoulder, and employers’ wouldn’t want that.
3. Oxford does actually impart skills to students. The strongest possibility here is that the weekly tutorial teaches one to bluff well.
My hunch is that 2 and 3 at least are strong arguments - not that I trust my hunches, though. But if Oxford were competing in a free marketplace for students, I doubt it would really market itself on these grounds. So perhaps a free market in universities would be a dishonest one.

Comments

[Sam]

How about
4. Anyone can say "I was offered an Oxford place, but turned it down", but the degree itself is verifiable. So there's really no signalling in being offered a place, because you can't check up on it.

and I'll also go for
5. The quality of one's peers has a huge impact on the education one receives. I had good tutors at Oxford, but I think a more significant effect was the scarily smart guy I had tutorials with. That was pure luck - had either he or I chosen a different college, I'd have only been educated alongside other normal mortals.

[PWG]

Just to muddy the waters further, I am sure higher education is a Veblen good - if a university charges high fees, it sends out a signal that it provides a strong product.

[Sean]

Chris, you're brilliant--don't ever stop blogging.

[OurSally]

Well I was at the other place, but it did me one tremendous favour; I came from primary and grammar school where I had always been top of the class without really trying. Suddenly I was dropped in an environment where I was average. It took me down a tremendous peg, and it stopped me from being an arrogant bastard.

(People who know me might deny that. But I reckon I would have been much more unbearable if I had attended McPoly.)

[OurSally]

Speaking of "claiming to have been there", we got a new graduate who was full of having studied at Oxford. Since I don't have the accent (and don't normally mention it) he didn't realise I was one of the lucky ones. So I said brightly, oh, which college, we must have a few friends in common. So he mumbled, ah, the poly.

You have to take your fun where you can find it these days.

[Glenn]

I was too busy partying, playing in bands and sleeping to think about or notice what University was for (except for having a good time, obviously). After 3 years I woke up to find my degree course had ended and I'd miraculously achieved an upper second, and thought I'd like to do another 5 years, and so I did, and left with an armful of great qualifications but with a really poor wardrobe and a lack of decent foreign holidays. Then at the age of 27 I decided to enter the real world, and hey, work wasn't so bad after all (just as well because retirement is still 26 years away if I am lucky).

[Peter]

It also signals an ability to get on with other Oxford students - a soft skill which employers value.

But much more valuable in any business is the ability to work with people who haven't had an elite education. To be able to motivate staff, work in teams and communicate with the general public is surely much better than being comfortable cosying up to Bullingdon types.

Anyway, go to the non-elite places - there is some damn good teaching there - what a bargain.