On the optimal allocation of students when peer effect works: tracking vs mixing

The belief that both the behavior and outcomes of students are affected by their peers is important in shaping education policy. I analyze two polar education systems -tracking and mixing- and propose several criteria for their comparison. I find that tracking is the system that maximizes average human capital in societies where the distribution of pre-school achievement is not very dispersed. I also find that when peer effects and individuals’ pre-school achievement are close substitutes, all risk averse individuals prefer mixing.