How to distribute students in classes?

Excerpt from new study from NBER:

We find that students benefit from having higher achieving schoolmates and from having less variation in the quality of peers in their schools.... The marginal effect of a one percent increase in the quality of peers on student achievement is equivalent to between 8−15% of a one percent increase in one’s own earlier achievement.

We find that peer effects operate in a heterogeneous manner. High ability students benefit more from having higher achieving schoolmates and from having less variation in peer quality than students of lower ability.

And what is the long term effect? ( comment from Greg Mankiws blog)

One implication of this is that parents with smart kids will always find it more in their interest to have their kid in a school with other smart kids (given the complementarity); theyll always be more willing to outbid parents of less smart kids. So, we'll end up with a kind of separating equilbrium with smart kids together, which is, broadly speaking, what we see in reality.

In fact, some of the rise in inequality in the US is attributable to this kind of sorting in the workplace. Namely, with the entry of women into the workplace, we have smart men and women meeting and forming matches, thus raising household income inequality. As such, theres nothing sinister about inequality if this is a source. Indeed, inequality starting rising in the US when female labor force participation started rising.