Abstract
We assess whether financing can help private schools, which now account for one-third of primary school enrollment in low- and middle-income countries. Our experiment allocated unconditional cash grants to either one (L) or all (H) private schools in a village. In both arms, enrollment and revenues increased, leading to above-market returns. However, test scores increased only in H schools, accompanied by higher fees, and a greater focus on teachers. We provide a model demonstrating that market forces can provide endogenous incentives to increase quality and increased financial saturation can be used to leverage competition, generating socially desirable outcomes. (JEL I21, I22, I25, I28, L22, L26, N75, O15, O16)
Highlights
This paper tests for financial constraints as a market failure in education in a low-income country
As a complement to this literature, we have focused on the impact of policies that alter the overall operating environments for schools, leaving school inputs and enrollment choices to be determined in equilibrium
This threshold for N decreases as w increases, suggesting a negative relationship between the two. We formally prove these claims for both treatment arms and characterize the wN space where quality investment by at least one school is consistent with equilibrium
Summary
This paper tests for financial constraints as a market failure in education in a low-income country. Test scores and fees only increase in the setting of all private schools along with higher teacher wages This differential impact follows from a canonical oligopoly model with capacity constraints and endogenous quality: greater financial saturation crowds-in quality investments. The rise of private schooling in low- and middle-income countries o↵ers an opportunity to map policies to school responses by designing market-level interventions that uncover and address underlying market failures. We have leveraged “closed” education markets in rural Pakistan to identify labor and informational market failures and evaluated interventions that ameliorate them and improve education outcomes (Andrabi et al, 2013, 2017).2 In addition to these failures, data from our longitudinal study of rural schooling markets and interviews with school owners suggest that private schools lack access to financing, with few external funding sources outside their own families We have leveraged “closed” education markets in rural Pakistan to identify labor and informational market failures and evaluated interventions that ameliorate them and improve education outcomes (Andrabi et al, 2013, 2017). In addition to these failures, data from our longitudinal study of rural schooling markets and interviews with school owners suggest that private schools lack access to financing, with few external funding sources outside their own families
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