Education Vouchers, the Peer Group Problem, and the Question of Dropouts

Abstract

1. Introduction Since 1990, there has appeared a burgeoning literature, both theoretical and empirical, on the effects of school vouchers (see Hoxby 1996; Hoenack 1997; West 1997; Hoyt and Lee 1998; Rouse 1998b). Because the use of vouchers increases the size of the private school sector at the expense of the public and because of the public policy controversy that that result has created, considerable attention has been directed at measuring the efficiency of private schools relative to public (Evans and Schwab 1995; Sander and Krautman 1995). Here the early claim in the literature-that Catholic schools (Coleman, Hoffer, and Kilgore 1982)-has driven much of the subsequent analysis and has led critics to emphasize that early results that at first sight seem favorable to Catholic schools could result from and/or parent selection bias (Murnane, Newstead, and Olsen 1985; Neal 1997). After controlling for various selection biases (Figlio and Stone 1999), researchers have accordingly tended to find that private schools (as a group) do not perform any better than do their public counterparts (Neal 1998).' Two aspects of this debate have attracted our attention. First, most participants use student (i.e., the ability to score well on tests in math, English, science, and so on) as the benchmark for measuring educational performance and hence the basis for assessing the impact of vouchers. Our paper is both an addition to and a departure from this approach. We focus on the role of vouchers in relation to school dropouts, a somewhat different and, we believe, as important a measure of school performance? Second, we have noticed that much of the evaluation of the performance of private and public schools compares only alternative benefits without invoking the caveat that efficiency issues cannot be resolved without a similar analysis of cost. Thus, while our analysis follows in this tradition by comparing only the effect of vouchers on alternative measures of education benefits, we recognize that greater voucher use may well bring about efficiency changes on the cost side that would dominate these considerations.3 These comments are not to detract from the rich variety of approaches to the question of how the mix of school types affects academic performance and how vouchers relate to that mix. The current literature analyzes many issues that complement those raised in this paper. They include the role of vouchers in relation to mobility and geographic location (Neal 1997; Hoxby 2000; Nechyba 2000), the relative performance of religious versus nonreligious private schools on high school achievement and completion rates (Figlio and Stone 1999), and the relationship between school dropouts and both teenage pregnancy (Ribar 1994) and alcohol use/ abuse (Ribar 1999). Our contribution to the voucher debate begins from a recent series of papers by Manski (1992), Epple and Romano (1998a, b), and Nechyba (2000), who have emphasized the presence of one particular educational spillover in the use of school vouchers-the peer group problem. This is an external effect that vouchers may have on public schools by helping private schools diminish the pool of higher-ability students that remain in the public system. By allowing lowerincome students of high aptitude and ability to leave the public school system, it is argued, a voucher system encourages private schools to skim the cream off the public school system and so depreciate the average quality of students that remain behind.4 Because the quality of education received by students is, in part, a function of the quality of their classmates, the loss of higher-ability students reduces the quality of education received by those remaining in the public system. On the other hand, private schools receiving the incoming benefit are led by competition to internalize the externality through a fee structure that discriminates by ability (e. …