Competition Between Private and Public Schools, Vouchers, and Peer-Group Effects

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American Economic Association

Competition between Private and Public Schools, Vouchers, and Peer-Group Effects Author(s): Dennis Epple and Richard E. Romano
Source: The American Economic Review, Vol. 88, No. 1 (Mar., 1998), pp. 33-62 Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/116817 .
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CompetitionBetween Privateand Public Schools,
Vouchers, and Peer-GroupEffects
By DENNIS EPPLE AND RICHARD E. ROMANO*
A theoretical and computational model with tax-financed, tuition-free public schools and competitive, tuition-financedprivate schools is developed. Students differ by ability and income. Achievement depends on own ability and on peers' abilities. Equilibrium has a strict hierarchy of school qualities and twodimensional student sorting with stratification by ability and income. In private schools, high-ability, low-income students receive tuition discounts, while lowability, high-income students pay tuition premia. Tuition vouchers increase the relative size of the private sector and the extent of student sorting, and benefit high-ability students relative to low-ability students. (JEL H42, 128) Discontent in the United States with the primary and secondary educational system has become the norm. The decline in SAT scores

in the 1970's, embarrassinginternationalcomparisons of student achievement, slow growth in productivity measures, and increasing disparity in earnings all call into question the quality of the educational system.' Education

policy figured prominently in recenit presidential elections. The debate has centered on issues of school choice, including voucher systems (Karen De Witt, 1992). Typical voucher proposals provide students attending private

schools a tax-financed, school-redeemable
voucher of fixed amount toward (or possibly
covering) tuition. Although a 1993 California
referendumfor vouchers was defeated, policy
change at state and local levels abounds, as
does change in the private educational sector.
The state of Minnesota and school districts in
30 states allow residents to choose the public
school their children attend.2The city of Milwaukee introduced a voucher system in the 1989-1990 school year. A -number f private
o
school and private-public school initiatives
are developing (see e.g., John F. Witte et al.,
1993; Steve Forbes, 1994; Steven Glazerman
and RobertH. Meyer, 1994; Joe Nathan, 1994;
Newsweek, 1994; Wall Street Journal, 1994;
Steven Baker, 1995; Jay P. Green et al.,
1996). Educational reform emphasizing increased school competition with an increased

* Epple: GraduateSchool of IndustrialAdministration,
Carnegie Mellon University,...
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