Working Paper: NBER ID: w15112
Authors: W. Bentley MacLeod; Miguel Urquiola
Abstract: Friedman (1962) argued that a free market in which schools compete based upon their reputation would lead to an efficient supply of educational services. This paper explores this issue by building a tractable model in which rational individuals go to school and accumulate skill valued in a perfectly competitive labor market. To this it adds one ingredient: school reputation in the spirit of Holmstrom (1982). The first result is that if schools cannot select students based upon their ability, then a free market is indeed efficient and encourages entry by high productivity schools. However, if schools are allowed to select on ability, then competition leads to stratification by parental income, increased transmission of income inequality, and reduced student effort---in some cases lowering the accumulation of skill. The model accounts for several (sometimes puzzling) findings in the educational literature, and implies that national standardized testing can play a key role in enhancing learning.
Keywords: School Reputation; Educational Quality; Inequality; Market Efficiency; Standardized Testing
JEL Codes: D02; I2; J3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Schools cannot select students based on ability (I24) | Market for educational services operates efficiently (I21) |
| Market for educational services operates efficiently (I21) | High productivity schools enter the market (D29) |
| Schools can select students based on ability (I23) | Stratification based on parental income (I24) |
| Stratification based on parental income (I24) | Increased income inequality (D31) |
| Stratification based on parental income (I24) | Reduced student effort (D29) |
| Selective schools (I23) | Drive non-selective schools out of the market (D49) |
| Drive non-selective schools out of the market (D49) | Exacerbate educational inequality (I24) |
| National standardized testing (I28) | Level the playing field (I24) |
| Level the playing field (I24) | Enhance overall educational quality (I24) |
| Characteristics of students (I21) | Influence perceived quality of a school (I24) |