The diverse effects of private competitors on public service performance: evidence from New Jersey’s school system

Abstract

An important question underlying government policies that aim to introduce competition from the private sector into public service markets, is whether the presence of privately managed service providers affects the performance of public providers. On the one side, neoclassical economic theory would predict that competition from the private sector has a positive effect on public service performance. However, on the other side, institutional theories would predict a negative, or no effect at all. Using a 9-year panel data set of New Jersey schools, we find some evidence for both models. In most cases, the presence of privately managed charter schools is associated with an increase in public school performance, but the expansion of charter schools is associated with a decrease in performance. Our findings suggest that the effects of private competitors on public service performance are diverse and that multiple mechanisms can be at play simultaneously.