Competition between private and public schools: testing stratification and pricing predictions |
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| Affiliation: | 1. Graduate School of Industrial Administration, Carnegie Mellon University, Pittsburg, PA 15213, USA;2. Department of Economics, University of Florida, Gainesville, FL 32611-7140, USA;3. National Bureau of Economic Research, Cambridge, MA 02138, USA;1. Texas A&M University, United States;2. Instituto Technologico Autonomo de Mexico, Mexico;1. Institute for Fiscal Studies, 7 Ridgmount Street, London WC1E 7AE, UK;2. University College London, London, UK;3. UCL Institute of Education, London, UK;4. Inter-American Development Bank, Washington DC, USA;1. MIDE UC, Pontificia Universidad Católica de Chile, Chile;2. School of Education, Pontificia Universidade Católica do Rio de Janeiro, Brazil;3. Public Policy Institute, School of Business and Economics, Universidad Diego Portales, Chile;4. School of Education, Universidade Federal do Rio de Janeiro, Brazil;5. Department of Sociology, New York University, United States;1. Universidad de Chile, Diagonal Paraguay 257, Santiago, Chile;2. Economics Department, Universidad de Chile, Diagonal Paraguay 257, Santiago, Chile |
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| Abstract: | When there are peer effects in education, private schools have an incentive to vary tuition to attract relatively able students. Epple and Romano [American Economic Review 88(1) (1998) 33] develop a general equilibrium model characterizing equilibrium pricing and student selection into schools when peer effects are present. The model predicts that competition will lead private schools to give tuition discounts to more able students, and that this will give rise to an equilibrium exhibiting stratification by income and ability between the public and private sectors and to a hierarchy of schools within the private sector. The model also yields a variety of comparative-static predictions. The predictions of the model are tested in this paper using a unique data set assembled by Figlio and Stone [Research in Labor Economics (1999) 115]. Tests of equilibrium predictions of the model reveal that: The propensity to attend private school increases with both income and ability, and, among private schools, the propensity to attend the highest-tuition schools rises with both income and ability. Within private schools, tuition declines with student ability, with a substantial number of even high-income households paying little or no tuition. The correlation between income and ability is greater in public than private schools. Tests of comparative static predictions of the model reveal that: Both income and ability become stronger predictors of private school attendance as public school expenditure falls. Income becomes increasingly important in determining placement in the private school hierarchy as public school expenditure falls. Discounts to ability in the lowest-quality private school decline as public school expenditure rises while discounts to ability in the highest-quality private school are little affected by changes in public school expenditure. Expenditure in private schools rises as expenditure in public schools increases. These empirical results are consistent with the predictions of the theoretical model. |
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