What does this theory predict relative to theory that people are interested in quality teaching and research, and they use reputation as a not terribly reliable proxy for it, as quality is too hard to measure for most people?
People in the US do not use prestige as a proxy for teaching, or at least that is quite inconsistent with their other claims. Everyone agrees that large research schools are bad at teaching and that at least some small schools are better. But very few people turn down Harvard to go to Williams, so they seem to admit to having other priorities than teaching.
There is more to learning than teaching, namely the classmates. It may be a coordination issue: the good students want to be together, but it doesn't matter much where, so there are multiple equilibria: in France the undergrads want to go to different schools than the grad students. (Robin's theory seems to predict that this shouldn't happen, but not terribly strongly.) ETA: also, in the US, liberal arts schools and state research universities largely flip prestige between the (undergrad) students and the faculty.
(Yes, it makes sense that journalists and grad students should look to prestige as a proxy for research.)
Everyone agrees that large research schools are bad at teaching and that at least some small schools are better.
"Everyone agrees" huh? Do you have any evidence for that? As far as I can tell correlation between prestige, research quality, and teaching quality is highly positive in Polish universities' computer science (that's the only kind I know closely, for everything else I would just guess their quality from their prestige).
Bryan Caplan writes:
Robin Hanson offers an explanation:
I wonder, what does this look like in the cross section? In other words, relative to other academic disciplines, which have the strongest tendency to celebrate difficult work but ignore sound-yet-unimpressive work? My hunch is that economics, along with most other social sciences, would be the worst offenders, while the fields closer to engineering will be on the other end of the spectrum. Engineers should be more concerned with truth since whatever they build has to, you know, work. What say you? More importantly, anyone have any evidence?