An introduction to the economics of school choice

Spurred by perceived inefficiencies in centralised education systems, school choice has in the past decades gone from a mostly fringe academic theory to a mainstream policy option worldwide. The idea is that the expansion of choice – through, for example, open enrolment and private-school vouchers – will increase market incentives in the school system, thereby spurring higher productivity in the sector.

According to economic theory, one would generally expect markets to be more efficient than monopolies in allocating resources, leading to competitive pressures, emulation of best practices, and innovation. Broadly speaking, there are three mechanisms through which choice is supposed to increase education quality. First, it may improve the match between pupils and schools. Second, if choice leads to a reallocation of pupils to higher-quality schools, we would assume that achievement would improve. Third, choice forces schools to compete to attract pupils, leading them to improve or go bust.

However, there are also reasons to be sceptical of school markets, which are in many ways very different to other markets. Indeed, school markets in the developed world are 'quasi-markets' where the government pays the bill. This also means that the price mechanism – which normally acts as an easily interpretable signal to consumers and producers how to act – does generally not exist in developed-world education systems.

Even in cases where the price mechanism does exist, as in many developing countries, education quality is complex and not easily discernible, making it difficult for parents to hold schools accountable for their performance. More advantaged parents may also primarily seek to use choice to segregate their children rather than maximising school quality. If so, we may merely expect choice to induce incentives among schools to 'cream skim' pupils to build their reputation in the market.

But what does the empirical evidence say? Overall, research often finds small-to-moderate positive effects of choice and competition on academic outcomes. There is little evidence of outright negative effects, with some exceptions. Interestingly, the findings from the developing world, where school markets are perhaps more similar to regular markets, often indicate more consistently positive effects in this respect.

Yet choice affects much more than achievement. For example, it has been shown to be negative for pupil wellbeing in the same setting as it has been found to have positive effects on achievement and negative effects on costs. It has also been found to increase school segregation in some settings, while decreasing residential segregation in others.

The idea that school choice is a panacea or that it is entirely negative, as it is often claimed by supporters and detractors respectively, is therefore not supported by the literature. Instead, the effects of choice likely depend on the institutional framework in which it operates. For example, parents often start choosing better schools when they are provided with quality information, indicating that informational interventions may improve the functioning of choice. In other words, market design is all important – and further research on the architecture necessary to maximise the benefits of choice would be fruitful indeed.

Further reading

Abdulkadiroğlu, Atila, Parag A. Pathak, and Christopher R. Walters. 2018. 'Free to Choose: Can School Choice Reduce Student Achievement?' American Economic Journal: Applied Economics 10(1):175-206.

Angrist, Joshua D., Sarah R. Cohodes, Susan M. Dynarski, Parag A. Pathak, and Christopher R. Walters. 2016. 'Stand and Deliver: Effects of Boston's Charter High Schools on College Preparation, Entry, and Choice.' Journal of Labor Economics 34(2):275-318.

Billings, Stephen B., Eric J. Brunner, and Stephen L. Ross. 2018. 'Gentrification and Failing Schools: The Unintended Consequences of School Choice.' Review of Economics and Statistics 100(1):65-77.

Böhlmark, Anders, Helena Holmlund, and Mikael Lindahl. 2016. 'Parental Choice, Neighbourhood Segregation or Cream Skimming? An Analysis of School Segregation after a Generalized Choice Reform.' Journal of Population Economics 29(4):1155-1190.

Heller-Sahlgren, Gabriel. 2013. Incentivising Excellence: School Choice and Education Quality. CfEE: London.

Heller-Sahlgren, Gabriel. 2018. 'Smart but Unhappy? Independent-school Competition and the Wellbeing-efficiency Trade-off in Education.' Economics of Education Review 62:66-81.

Lavy, Victor. 2018. 'The Long-term Consequences of Free School Choice'. NBER Working Paper.

Muralidharan, Karthik and Venkatesh Sundararaman. 2015. 'The Aggregate Effect of School Choice: Evidence from a Two-Stage Experiment in India.' Quarterly Journal of Economics 130(3):1011-1066.