Competition and school productivity: Incentives writ large

W. Bentley MacLeod Miguel Urquiola

Columbia University and NBER

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Outline

1 Introduction

2 Competition and test productivity: The evidence

3 Incentives writ large and the anti-lemons e�ect

4 Why is education di�erent from other markets?

5 Policy implications

6 Conclusion

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Outline

1 Introduction

2 Competition and test productivity: The evidence

3 Incentives writ large and the anti-lemons e�ect

4 Why is education di�erent from other markets?

5 Policy implications

6 Conclusion

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Introduction

We are grateful for IGC's support of:

Anti-lemons: School competition, relative diversity and educationalqualityCompetition 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?

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Friedman (1955, 1962)

The market mechanism is often suggested as a way to improve theeconomic performance of developing and developed economies:

Firms are free to enter with new productsConsumers are free to purchase them or not

Milton Friedman (1962) was an in�uential proponent of this institution

Sellers' concern for reputation ensures unfettered markets are e�cientIn the area of Education, Friedman (1955, 1962):

Proposed a greater role for private schools, parental choiceAcknowledged this would have distributional implicationsArgued these could be addressed via vouchers

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This view has been in�uential

World Development Report (2004): �Poor people�as patients in clinics,students in schools...�are the clients of services. They have a relationshipwith 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

dissatis�ed, he has the power over the provider with repeat business.�

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Would competition enhance student test score productivity?

Reviewing work since Friedman, Hoxby (2002) emphasizes test scoreproductivity

�A school that is more productive is one that produces higherachievement in its pupils for each dollar it spends��An increase in productivity could be a rising tide that lifts all boats�

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Outline

1 Introduction

2 Competition and test productivity: The evidence

3 Incentives writ large and the anti-lemons e�ect

4 Why is education di�erent from other markets?

5 Policy implications

6 Conclusion

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The literature generally expects competition to raise test productivity

Two sources of e�ect (e.g. McEwan, 2004; Barrow and Rouse, 2009):

1 A private productivity advantage2 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 sectorThe second requires observing a substantial change in some market

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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 e�ects,existing evidence does not support the view that private schools aregenerally superior to public schools in all settings.�Barrow and Rouse (2009): �The best research to date �nds relativelysmall achievement gains for students o�ered education vouchers, mostof which are not statistically di�erent from zero.�

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Evidence from developing countries

We review the evidence from developing countries

Focusing on the countries/studies that arguably identify causal e�ects

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

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Evidence from developing countries

Consistent with work on the e�ect of attending a higher achievementschool/class (even when this does not involve changing sectors):

Some papers �nd little or no e�ect ...

Cullen, Jacob and Levitt (2005), Clark (2010), Du�o, Dupas andKremer (2010), Abdulkadiroglu et al. (2011)

Some �nd positive e�ects ...

Pop-Eleches and Urquiola (2008), Jackson (2010)

But no uniform pattern emerges

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The literature generally expects competition to raise test productivity

Two sources of e�ect (e.g. McEwan, 2004; Barrow and Rouse, 2009):

1 A private productivity advantage2 A generalized response; particularly on the part of public schools

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The e�ects 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-pro�t unsubsidized entryChile: Perhaps central example of a Friedman-type voucher scheme

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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 percentPunjab: 15 to 30 percentNearly all the growth is due to secular, for-pro�t institutions

�Nearly all rich children in urban areas, almost a third of the richerrural children, and close to 10 percent of children in the poorest decilesnationally were studying in private schools�

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Pakistan

Andrabi, Das, and Khwaja (2008)

This large scale private entry is feasible due to low costsA typical private school in a village charges $18/yearHires young, single, untrained local womenOperate predominantly at the primary level

�This implies that society could buy education for much lower cost if itfurther shifted enrollments to the private sector�

�Would this come at a cost of much lower educational attainment? ...Not necessarily�

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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-pro�t and implement admissions policiesSince 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 e�ectively voucher-funded schools

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The e�ect of the Chilean reform

Research (Hsieh and Urquiola (2006), August and Valenzuela (2006),Gallego (2006)) suggests it:

Had mixed e�ects on learning

Little improvement in international testing until recentlyLittle improvement in national testing to present day→ A �testing productivity collapse�

Substantially increased strati�cation

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Political consequences

In contrast with Chile's success with market-oriented reforms, thevoucher experiment led to massive student protests and calls for:

An end to for-pro�t 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

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Peer e�ects

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 e�ects)The evidence on peer e�ects is mixed

Oreopoulos (2003), Katz, Kling and Liebman (2006), Carrell, Sacerdoteand West (2010)(Peer e�ects are conceptually part of a school's value added)

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Outline

1 Introduction

2 Competition and test productivity: The evidence

3 Incentives writ large and the anti-lemons e�ect

4 Why is education di�erent from other markets?

5 Policy implications

6 Conclusion

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Incentives writ large

MacLeod-Urquiola (2011) introduce a competitive model ofeducation/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 backgroundSchool reputationIndividual-speci�c measures of skill (exams, letters of recommendation)

Skill accumulation depends on e�ort, Bishop (2006)No peer e�ectsSchool value added is a function of school productivity and resourcesThe incentives to study originate in labor market returns(Becker-Mincer-Schultz)

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Main ingredient

Students prefer selective schools because employers prefer theseschools' 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,

they're probably going to leave the best and the brightest, O.K.?

�Antonin Scalia

Individuals realize school membership credibly conveys information

Please accept my resignation. I don't want to belong to any club that

will accept me as a member. �Groucho Marx

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Anti-Lemons e�ect

In Akerlof's lemon's model asymmetric information leads to goodsellers leaving the market.

Schools are characterized by an anti-lemons e�ect�schools enhancetheir 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

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Why do parents and policymakers have di�erent views?

Policy makers increasingly appreciate that in order to measure schoolquality, one must take into account the fact that schools are strati�ed

e.g., N.Y.C. and Chile disseminate data approximating school valueadded

However, the anti-lemons e�ect predicts that parties care about thecombination of value added and school selectivity

In particular, it may be rational for parents to choose a highly selectiveschool over a non-selective schools with higher value added

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Impact upon student e�ort

In a world with selective schools employers use the school attended, aswell as individual measures of performance, to choose employees

Students' e�ort a�ects their individual measures, but not thereputation of their school

Hence, the more selective the school, the lower the incentive to work

This e�ect is particularly strong for individuals who are negativelyselected into the worst schools

Can explain why competition does not increase overall performance?

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Outline

1 Introduction

2 Competition and test productivity: The evidence

3 Incentives writ large and the anti-lemons e�ect

4 Why is education di�erent from other markets?

5 Policy implications

6 Conclusion

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Why did Friedman's prediction fail?

Education is not like a Samosa:

There is no well de�ned notion of education as a productStudents are more like employees than consumers; they are motivatedby the long run returns to education

→ Policy prescriptions di�er from standard market-based prescriptions

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What is a good?

A good is something that can be delivered at a particular time and forwhich there is a well de�ned performance obligation

Macleod (2007) JEL paper on goods and contracts

When there is a well functioning legal system, a buyer can ask a sellerto be compensated for the delivery of a defective product

When legal enforcement is weak, then reputations can act as asubstitute for a legally binding agreement

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Education as a good

In the case of education how would one de�ne performance?

If a school does not deliver how would a court enforce the promise of agood quality education?

Even in the U.S. there are no cases in which parents have successfullysued 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 legalsystem, then there is no reason to expect Friedman's argument to work

(Note: health care is di�erent�in many cases its quality IS legallyenforceable!)

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Education as employment

Education is more like an employment relationship:

Students/employees are required to attend with regular hoursStudents/employees are expected to study/workStudents/employees are regularly evaluated by teacher/employers

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However, there are di�erences

Student/employees can almost never be �red:

Public schools are the �suppliers of last resort�Many observers claim that the inability to �re teachers explainsschools' poor performanceThe same logic presumably applies to students?

Students/employees are not paid

→ rewards for hard work must come from other sources

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Outline

1 Introduction

2 Competition and test productivity: The evidence

3 Incentives writ large and the anti-lemons e�ect

4 Why is education di�erent from other markets?

5 Policy implications

6 Conclusion

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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 bothupon schools and students

Recognizes that students are like employeesHence school performance depends upon both school value added andmanaging expectations regarding future rewards for students

In brief - if students have no future, then no matter how good theschool, they will not �drink from the fountain of knowledge� (Bishop(2006))

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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 IPUMSdata (Integrated Public Use Microdata Series, International) we canlook at the relationship between education and occupations

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Fraction of pop. with some post-secondary education

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What might we conclude?

The fact that there is a lack of highly educated individuals mightsuggest that becoming rich simply requires more education

Certainly, many economists point to the high returns to education andconclude that more individuals should get more education, and as aconsequence 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.SFrom the individuals perspective this means that it is going to be hardto get a college education

Second, given that one has a college education then what sort of workwill one �nd?

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Occupation choices for individuals with some college

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Hope?

The di�erences in distribution by occupation between these countriesis striking.

Notice the fraction of individuals NIU�these are individuals who at thetime of interview were unemployed or otherwise out of the labormarket

In Ghana and Tanzania there is a 30% chance of being NIU! Giventhis data a rational student might think twice about pursuing a degree

Notice that this number is also quite high for the U.S.�partially thisre�ects women leaving for child rearing (see the recent work by Goldenand Katz using the Harvard and Beyond data)

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Education and Labor Force Participation

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Outline

1 Introduction

2 Competition and test productivity: The evidence

3 Incentives writ large and the anti-lemons e�ect

4 Why is education di�erent from other markets?

5 Policy implications

6 Conclusion

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Implications: School market design

Main implications highlight the need for:

1 Mechanisms aligning student expectations with labor market outcomes2 Mechanisms aligning schools' reputation with their value added

Open enrollment + admissions lotteries�e.g., U.S. for charter schoolsNational graduation exams that may be used by employers

Provide signals to students on the relationship between achievementand employmentAllow 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 theanti-lemons e�ect�entry of selective schools whose only goal is toattract the best students

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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 e�ortdo not changeThey may be a poor investment if there is not a corresponding increasein labor market demand for skills

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Conclusions

Education is not like a samosa

Anti-Lemons e�ect: Schools can build reputations by selecting studentsrather than by providing the best educationStudents' choices and incentives are guided by the past experiences ofindividuals with similar test scores and backgroundsGovernment can help link labor markets and schools by enhancinginformation regarding individual capabilities

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