Working Paper: NBER ID: w25117
Authors: W. Bentley MacLeod; Miguel Urquiola
Abstract: Friedman (1955) argued that giving parents freedom to choose schools would improve education. His argument was simple and compelling because it extended results from markets for consumer goods to education. We review the evidence, which yields surprisingly mixed results on Friedman’s prediction. A key reason is that households often seem to choose schools based on their absolute achievement rather than their value added. We show this can be rational in a model based on three ingredients economists have highlighted since Friedman worked on the issue. First, education is an investment into human capital (Becker, 1964). Second, labor markets can feature wage premia: individuals of a given skill level may receive higher wages if they match to more productive firms (Card et al., 2018). Third, distance influences school choice and the placements schools produce (Abdulkadiroglu et al., 2017, Weinstein, 2017). These imply that choice alone is too crude a mechanism to ensure the effective provision of schooling.
Keywords: School Choice; Human Capital; Labor Market; Education Investment
JEL Codes: I21; J01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Households' beliefs about how employers will value their skills (J29) | Households' school choices (D19) |
| Quality of school (value added vs. absolute achievement) (I21) | Skill level of graduates (A23) |
| School attended (I23) | Labor market outcomes (such as wages) (J39) |
| Households' school choices (D19) | Labor market success (J29) |
| Increasing school choice (I21) | Educational outcomes (I21) |
| Increasing school choice (under perfect matching and no transaction costs) (C78) | Enhanced educational outcomes (I24) |
| Increasing school choice (with transaction costs) (D23) | Worse educational outcomes (I24) |