1. Competition and school productivity: Incentives writ large
W. Bentley MacLeod Miguel Urquiola
Columbia University and NBER
1 / 44

2. Outline
1 Introduction
2 Competition and test productivity: The evidence
3 Incentives writ large and the anti-lemons eect
4 Why is education dierent from other markets?
5 Policy implications
6 Conclusion
2 / 44

3. Outline
1 Introduction
2 Competition and test productivity: The evidence
3 Incentives writ large and the anti-lemons eect
4 Why is education dierent from other markets?
5 Policy implications
6 Conclusion
3 / 44

4. Introduction
We are grateful for IGC's support of:
Anti-lemons: School competition, relative diversity and educational
quality
Competition and educational productivity: Incentives writ large
These two papers use economic theory to address:
Why do educational markets often perform poorly?
Why has the use of vouchers/free entry not lived up to its promise?
How should a school system be structured to optimize performance?
Should it make use of private schools?
Use selective admissions?
Use standardized exit exams?
4 / 44

5. Friedman (1955, 1962)
The market mechanism is often suggested as a way to improve the
economic performance of developing and developed economies:
Firms are free to enter with new products
Consumers are free to purchase them or not
Milton Friedman (1962) was an inuential proponent of this institution
Sellers' concern for reputation ensures unfettered markets are ecient
In the area of Education, Friedman (1955, 1962):
Proposed a greater role for private schools, parental choice
Acknowledged this would have distributional implications
Argued these could be addressed via vouchers
5 / 44

6. This view has been inuential
World Development Report (2004): Poor peopleas patients in clinics,
students in schools...are the clients of services. They have a relationship
with the frontline providers....
Poor people have a similar relationship when they buy something in the
market, such as a sandwich (or a samosa, a salteña, a shoo-mai). In a
competitive market transaction, they get the 'service' because they can hold
the provider accountable. That is, the consumer pays the provider directly;
he can observe whether or not he has received the sandwich; and if he is
dissatised, he has the power over the provider with repeat business.
6 / 44

7. Would competition enhance student test score productivity?
Reviewing work since Friedman, Hoxby (2002) emphasizes test score
productivity
A school that is more productive is one that produces higher
achievement in its pupils for each dollar it spends
An increase in productivity could be a rising tide that lifts all boats
7 / 44

8. Outline
1 Introduction
2 Competition and test productivity: The evidence
3 Incentives writ large and the anti-lemons eect
4 Why is education dierent from other markets?
5 Policy implications
6 Conclusion
8 / 44

9. The literature generally expects competition to raise test productivity
Two sources of eect (e.g. McEwan, 2004; Barrow and Rouse, 2009):
1 A private productivity advantage
2 A generalized response; particularly on the part of public schools
A contrast between these:
The rst can be analyzed in any country with a private school sector
The second requires observing a substantial change in some market
9 / 44

10. Is there a private school productivity advantage?
Much research in the U.S. attempts to provide a rigorous answer
Two recent reviews:
Neal (2009): Measured solely by achievement and attainment eects,
existing evidence does not support the view that private schools are
generally superior to public schools in all settings.
Barrow and Rouse (2009): The best research to date nds relatively
small achievement gains for students oered education vouchers, most
of which are not statistically dierent from zero.
10 / 44

11. Evidence from developing countries
We review the evidence from developing countries
Focusing on the countries/studies that arguably identify causal eects
e.g. Colombia, K-12 schooling
Angrist, Bettinger, Bloom, Kremer and King (2002)
Angrist, Bettinger, and Kremer (2006)
Bettinger, Kremer, and Saavedra (2008)
e.g., India, Higher education
Sekhri and Rubinstein (2010)
→ This research also yields mixed results
11 / 44

12. Evidence from developing countries
Consistent with work on the eect of attending a higher achievement
school/class (even when this does not involve changing sectors):
Some papers nd little or no eect ...
Cullen, Jacob and Levitt (2005), Clark (2010), Duo, Dupas and
Kremer (2010), Abdulkadiroglu et al. (2011)
Some nd positive eects ...
Pop-Eleches and Urquiola (2008), Jackson (2010)
But no uniform pattern emerges
12 / 44

13. The literature generally expects competition to raise test productivity
Two sources of eect (e.g. McEwan, 2004; Barrow and Rouse, 2009):
1 A private productivity advantage
2 A generalized response; particularly on the part of public schools
13 / 44

14. The eects of generalized, large scale competition
In the U.S., inter-district choice is the main example
The evidence on its impact is also mixed
e.g. Hoxby (2000), Rothstein (2007)
Two countries illustrate contributions in developing country contexts:
Pakistan: Extensive for-prot unsubsidized entry
Chile: Perhaps central example of a Friedman-type voucher scheme
14 / 44

15. Pakistan
Unsubsidized private entry in low income settings
Andrabi, Das, Khwaja (2008) consider four large provinces in Pakistan
Substantial growth in private enrollment:
Balochistan: 4 to 6 percent
Punjab: 15 to 30 percent
Nearly all the growth is due to secular, for-prot institutions
Nearly all rich children in urban areas, almost a third of the richer
rural children, and close to 10 percent of children in the poorest deciles
nationally were studying in private schools
15 / 44

16. Pakistan
Andrabi, Das, and Khwaja (2008)
This large scale private entry is feasible due to low costs
A typical private school in a village charges $18/year
Hires young, single, untrained local women
Operate predominantly at the primary level
This implies that society could buy education for much lower cost if it
further shifted enrollments to the private sector
Would this come at a cost of much lower educational attainment? ...
Not necessarily
16 / 44

17. The Chilean experiment
In 1981 Chile introduced an unrestricted voucher scheme
Funds public and private voucher schools on equal terms
The latter can be for-prot and implement admissions policies
Since 1997, the latter can charge tuition add-ons
By 2009, private enrollment was up by 51 percentage points (up to 57)
94 percent of all children attend eectively voucher-funded schools
17 / 44

18. The eect of the Chilean reform
Research (Hsieh and Urquiola (2006), August and Valenzuela (2006),
Gallego (2006)) suggests it:
Had mixed eects on learning
Little improvement in international testing until recently
Little improvement in national testing to present day
→ A testing productivity collapse
Substantially increased stratication
18 / 44

19. Political consequences
In contrast with Chile's success with market-oriented reforms, the
voucher experiment led to massive student protests and calls for:
An end to for-prot education (K-12 and higher education)
Quality education for all
Greater subsidies for higher education
Similar to concerns about low returns/high debt seen in U.S. and China
19 / 44

20. Peer eects
The Chilean outcome is all the more surprising given that:
Parents value higher testing performance
Black (1999); Hastings and Weinstein (2008)
(But if higher achievement schools do not supply higher value added,
why would parents be willing to pay to access them?)
(The traditional answer involves peer eects)
The evidence on peer eects is mixed
Oreopoulos (2003), Katz, Kling and Liebman (2006), Carrell, Sacerdote
and West (2010)
(Peer eects are conceptually part of a school's value added)
20 / 44

21. Outline
1 Introduction
2 Competition and test productivity: The evidence
3 Incentives writ large and the anti-lemons eect
4 Why is education dierent from other markets?
5 Policy implications
6 Conclusion
21 / 44

22. Incentives writ large
MacLeod-Urquiola (2011) introduce a competitive model of
education/labor market to account for these facts
Use the following ingredients:
A person's wage is equal to the market's best estimate of her skill given
(Jovanovic (1979)):
Family background
School reputation
Individual-specic measures of skill (exams, letters of recommendation)
Skill accumulation depends on eort, Bishop (2006)
No peer eects
School value added is a function of school productivity and resources
The incentives to study originate in labor market returns
(Becker-Mincer-Schultz)
22 / 44

23. Main ingredient
Students prefer selective schools because employers prefer these
schools' graduates:
Firms' reputations increase with the quality of their buyers
By and large, I'm going to be picking from the law schools that
basically are the hardest to get into. They admit the best and the
brightest, and they may not teach very well, but you can't make a
sow's ear out of a silk purse. If they come in the best and the brightest,
Antonin Scalia
they're probably going to leave the best and the brightest, O.K.?
Individuals realize school membership credibly conveys information
Groucho Marx
Please accept my resignation. I don't want to belong to any club that
will accept me as a member.
23 / 44

24. Anti-Lemons eect
In Akerlof 's lemon's model asymmetric information leads to good
sellers leaving the market.
Schools are characterized by an anti-lemons eectschools enhance
their reputations by selecting the most able students
→ allocate resources to selectivity rather than value added
Students/parents strive to access the most selective schools
This explains why parents prefer schools with better peer groups
Even with evidence these may have no greater value added
24 / 44

25. Why do parents and policymakers have dierent views?
Policy makers increasingly appreciate that in order to measure school
quality, one must take into account the fact that schools are stratied
e.g., N.Y.C. and Chile disseminate data approximating school value
added
However, the anti-lemons eect predicts that parties care about the
combination of value added and school selectivity
In particular, it may be rational for parents to choose a highly selective
school over a non-selective schools with higher value added
25 / 44

26. Impact upon student eort
In a world with selective schools employers use the school attended, as
well as individual measures of performance, to choose employees
Students' eort aects their individual measures, but not the
reputation of their school
Hence, the more selective the school, the lower the incentive to work
This eect is particularly strong for individuals who are negatively
selected into the worst schools
Can explain why competition does not increase overall performance?
26 / 44

27. Outline
1 Introduction
2 Competition and test productivity: The evidence
3 Incentives writ large and the anti-lemons eect
4 Why is education dierent from other markets?
5 Policy implications
6 Conclusion
27 / 44

28. Why did Friedman's prediction fail?
Education is not like a Samosa:
There is no well dened notion of education as a product
Students are more like employees than consumers; they are motivated
by the long run returns to education
→ Policy prescriptions dier from standard market-based prescriptions
28 / 44

29. What is a good?
A good is something that can be delivered at a particular time and for
which there is a well dened performance obligation
Macleod (2007) JEL paper on goods and contracts
When there is a well functioning legal system, a buyer can ask a seller
to be compensated for the delivery of a defective product
When legal enforcement is weak, then reputations can act as a
substitute for a legally binding agreement
29 / 44

30. Education as a good
In the case of education how would one dene performance?
If a school does not deliver how would a court enforce the promise of a
good quality education?
Even in the U.S. there are no cases in which parents have successfully
sued to be compensated for the supply of low quality education
(though some have tried!)
Bottom line: if the quality of education cannot be ensured via the legal
system, then there is no reason to expect Friedman's argument to work
(Note: health care is dierentin many cases its quality IS legally
enforceable!)
30 / 44

31. Education as employment
Education is more like an employment relationship:
Students/employees are required to attend with regular hours
Students/employees are expected to study/work
Students/employees are regularly evaluated by teacher/employers
31 / 44

32. However, there are dierences
Student/employees can almost never be red:
Public schools are the suppliers of last resort
Many observers claim that the inability to re teachers explains
schools' poor performance
The same logic presumably applies to students?
Students/employees are not paid
→ rewards for hard work must come from other sources
32 / 44

33. Outline
1 Introduction
2 Competition and test productivity: The evidence
3 Incentives writ large and the anti-lemons eect
4 Why is education dierent from other markets?
5 Policy implications
6 Conclusion
33 / 44

34. Basic goals
Traditionally, the Economics of Education focuses only upon schools'
role is producing skills (e.g., textbooks or teacher incentives)
Our analysis suggests that school system performance depends both
upon schools and students
Recognizes that students are like employees
Hence school performance depends upon both school value added and
managing expectations regarding future rewards for students
In brief - if students have no future, then no matter how good the
school, they will not drink from the fountain of knowledge (Bishop
(2006))
34 / 44

35. Example - Higher education
There are many more college educated individuals in richer countries.
For example, consider Ghana, Tanzania, and the U.S.
per capita incomes (PPP) of $2,900, $1,400 and $47,000 respectively
We do not have good wage data for Africa, however using IPUMS
data (Integrated Public Use Microdata Series, International) we can
look at the relationship between education and occupations
35 / 44

36. Fraction of pop. with some post-secondary education
36 / 44

37. What might we conclude?
The fact that there is a lack of highly educated individuals might
suggest that becoming rich simply requires more education
Certainly, many economists point to the high returns to education and
conclude that more individuals should get more education, and as a
consequence the economy will be richer
Consider now the perspective of an individual thinking about college
First, in Africa college attendance is low compared to the U.S
From the individuals perspective this means that it is going to be hard
to get a college education
Second, given that one has a college education then what sort of work
will one nd?
37 / 44

38. Occupation choices for individuals with some college
38 / 44

39. Hope?
The dierences in distribution by occupation between these countries
is striking.
Notice the fraction of individuals NIUthese are individuals who at the
time of interview were unemployed or otherwise out of the labor
market
In Ghana and Tanzania there is a 30% chance of being NIU! Given
this data a rational student might think twice about pursuing a degree
Notice that this number is also quite high for the U.S.partially this
reects women leaving for child rearing (see the recent work by Golden
and Katz using the Harvard and Beyond data)
39 / 44

40. Education and Labor Force Participation
40 / 44

41. Outline
1 Introduction
2 Competition and test productivity: The evidence
3 Incentives writ large and the anti-lemons eect
4 Why is education dierent from other markets?
5 Policy implications
6 Conclusion
41 / 44

42. Implications: School market design
Main implications highlight the need for:
1 Mechanisms aligning student expectations with labor market outcomes
2 Mechanisms aligning schools' reputation with their value added
Open enrollment + admissions lotteriese.g., U.S. for charter schools
National graduation exams that may be used by employers
Provide signals to students on the relationship between achievement
and employment
Allow employers to know more about employee ability
Track the outcomes of students by ability, to guide policy
Policies that improve the matching process also mitigate the
anti-lemons eectentry of selective schools whose only goal is to
attract the best students
42 / 44

43. Resource-focused policies
Solid research shows certain inputs raise learning (e.g. Krueger, 1999,
and Angrist and Lavy, 1999; Banerjee et al., 2007)
The broader picture, however, is one of school productivity decline
(e.g. Hoxby, 2002 and Pritchett, 2003)
Resource-focused policies may lead to greater school value added, but:
They may disappoint if broader incentives for parental/student eort
do not change
They may be a poor investment if there is not a corresponding increase
in labor market demand for skills
43 / 44

44. Conclusions
Education is not like a samosa
Anti-Lemons eect: Schools can build reputations by selecting students
rather than by providing the best education
Students' choices and incentives are guided by the past experiences of
individuals with similar test scores and backgrounds
Government can help link labor markets and schools by enhancing
information regarding individual capabilities
44 / 44