Growth Week 2011: Ideas for Growth Session 6 - Human Capital

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Growth Week 2011: Ideas for Growth Session 6 - Human Capital

  1. 1. Competition and school productivity: Incentives writ large W. Bentley MacLeod Miguel Urquiola Columbia University and NBER 1 / 44
  2. 2. Outline1 Introduction2 Competition and test productivity: The evidence3 Incentives writ large and the anti-lemons eect4 Why is education dierent from other markets?5 Policy implications6 Conclusion 2 / 44
  3. 3. Outline1 Introduction2 Competition and test productivity: The evidence3 Incentives writ large and the anti-lemons eect4 Why is education dierent from other markets?5 Policy implications6 Conclusion 3 / 44
  4. 4. Introduction We are grateful for IGCs support of: Anti-lemons: School competition, relative diversity and educational quality Competition and educational productivity: Incentives writ large These two papers use economic theory to address: Why do educational markets often perform poorly? Why has the use of vouchers/free entry not lived up to its promise? How should a school system be structured to optimize performance? Should it make use of private schools? Use selective admissions? Use standardized exit exams? 4 / 44
  5. 5. Friedman (1955, 1962) The market mechanism is often suggested as a way to improve the economic performance of developing and developed economies: Firms are free to enter with new products Consumers are free to purchase them or not Milton Friedman (1962) was an inuential proponent of this institution Sellers concern for reputation ensures unfettered markets are ecient In the area of Education, Friedman (1955, 1962): Proposed a greater role for private schools, parental choice Acknowledged this would have distributional implications Argued these could be addressed via vouchers 5 / 44
  6. 6. This view has been inuential World Development Report (2004): Poor peopleas patients in clinics, students in schools...are the clients of services. They have a relationship with the frontline providers.... Poor people have a similar relationship when they buy something in the market, such as a sandwich (or a samosa, a salteña, a shoo-mai). In a competitive market transaction, they get the service because they can hold the provider accountable. That is, the consumer pays the provider directly; he can observe whether or not he has received the sandwich; and if he is dissatised, he has the power over the provider with repeat business. 6 / 44
  7. 7. Would competition enhance student test score productivity? Reviewing work since Friedman, Hoxby (2002) emphasizes test score productivity A school that is more productive is one that produces higher achievement in its pupils for each dollar it spends An increase in productivity could be a rising tide that lifts all boats 7 / 44
  8. 8. Outline1 Introduction2 Competition and test productivity: The evidence3 Incentives writ large and the anti-lemons eect4 Why is education dierent from other markets?5 Policy implications6 Conclusion 8 / 44
  9. 9. The literature generally expects competition to raise test productivity Two sources of eect (e.g. McEwan, 2004; Barrow and Rouse, 2009): 1 A private productivity advantage 2 A generalized response; particularly on the part of public schools A contrast between these: The rst can be analyzed in any country with a private school sector The second requires observing a substantial change in some market 9 / 44
  10. 10. Is there a private school productivity advantage? Much research in the U.S. attempts to provide a rigorous answer Two recent reviews: Neal (2009): Measured solely by achievement and attainment eects, existing evidence does not support the view that private schools are generally superior to public schools in all settings. Barrow and Rouse (2009): The best research to date nds relatively small achievement gains for students oered education vouchers, most of which are not statistically dierent from zero. 10 / 44
  11. 11. Evidence from developing countries We review the evidence from developing countries Focusing on the countries/studies that arguably identify causal eects e.g. Colombia, K-12 schooling Angrist, Bettinger, Bloom, Kremer and King (2002) Angrist, Bettinger, and Kremer (2006) Bettinger, Kremer, and Saavedra (2008) e.g., India, Higher education Sekhri and Rubinstein (2010) → This research also yields mixed results 11 / 44
  12. 12. Evidence from developing countries Consistent with work on the eect of attending a higher achievement school/class (even when this does not involve changing sectors): Some papers nd little or no eect ... Cullen, Jacob and Levitt (2005), Clark (2010), Duo, Dupas and Kremer (2010), Abdulkadiroglu et al. (2011) Some nd positive eects ... Pop-Eleches and Urquiola (2008), Jackson (2010) But no uniform pattern emerges 12 / 44
  13. 13. The literature generally expects competition to raise test productivity Two sources of eect (e.g. McEwan, 2004; Barrow and Rouse, 2009): 1 A private productivity advantage 2 A generalized response; particularly on the part of public schools 13 / 44
  14. 14. The eects of generalized, large scale competition In the U.S., inter-district choice is the main example The evidence on its impact is also mixed e.g. Hoxby (2000), Rothstein (2007) Two countries illustrate contributions in developing country contexts: Pakistan: Extensive for-prot unsubsidized entry Chile: Perhaps central example of a Friedman-type voucher scheme 14 / 44
  15. 15. Pakistan Unsubsidized private entry in low income settings Andrabi, Das, Khwaja (2008) consider four large provinces in Pakistan Substantial growth in private enrollment: Balochistan: 4 to 6 percent Punjab: 15 to 30 percent Nearly all the growth is due to secular, for-prot institutions Nearly all rich children in urban areas, almost a third of the richer rural children, and close to 10 percent of children in the poorest deciles nationally were studying in private schools 15 / 44
  16. 16. Pakistan Andrabi, Das, and Khwaja (2008) This large scale private entry is feasible due to low costs A typical private school in a village charges $18/year Hires young, single, untrained local women Operate predominantly at the primary level This implies that society could buy education for much lower cost if it further shifted enrollments to the private sector Would this come at a cost of much lower educational attainment? ... Not necessarily 16 / 44
  17. 17. The Chilean experiment In 1981 Chile introduced an unrestricted voucher scheme Funds public and private voucher schools on equal terms The latter can be for-prot and implement admissions policies Since 1997, the latter can charge tuition add-ons By 2009, private enrollment was up by 51 percentage points (up to 57) 94 percent of all children attend eectively voucher-funded schools 17 / 44
  18. 18. The eect of the Chilean reform Research (Hsieh and Urquiola (2006), August and Valenzuela (2006), Gallego (2006)) suggests it: Had mixed eects on learning Little improvement in international testing until recently Little improvement in national testing to present day → A testing productivity collapse Substantially increased stratication 18 / 44
  19. 19. Political consequences In contrast with Chiles success with market-oriented reforms, the voucher experiment led to massive student protests and calls for: An end to for-prot education (K-12 and higher education) Quality education for all Greater subsidies for higher education Similar to concerns about low returns/high debt seen in U.S. and China 19 / 44
  20. 20. Peer eects The Chilean outcome is all the more surprising given that: Parents value higher testing performance Black (1999); Hastings and Weinstein (2008) (But if higher achievement schools do not supply higher value added, why would parents be willing to pay to access them?) (The traditional answer involves peer eects) The evidence on peer eects is mixed Oreopoulos (2003), Katz, Kling and Liebman (2006), Carrell, Sacerdote and West (2010) (Peer eects are conceptually part of a schools value added) 20 / 44
  21. 21. Outline1 Introduction2 Competition and test productivity: The evidence3 Incentives writ large and the anti-lemons eect4 Why is education dierent from other markets?5 Policy implications6 Conclusion 21 / 44
  22. 22. Incentives writ large MacLeod-Urquiola (2011) introduce a competitive model of education/labor market to account for these facts Use the following ingredients: A persons wage is equal to the markets best estimate of her skill given (Jovanovic (1979)): Family background School reputation Individual-specic measures of skill (exams, letters of recommendation) Skill accumulation depends on eort, Bishop (2006) No peer eects School value added is a function of school productivity and resources The incentives to study originate in labor market returns (Becker-Mincer-Schultz) 22 / 44
  23. 23. Main ingredient Students prefer selective schools because employers prefer these schools graduates: Firms reputations increase with the quality of their buyers By and large, Im going to be picking from the law schools that basically are the hardest to get into. They admit the best and the brightest, and they may not teach very well, but you cant make a sows ear out of a silk purse. If they come in the best and the brightest, Antonin Scalia theyre probably going to leave the best and the brightest, O.K.? Individuals realize school membership credibly conveys information Groucho Marx Please accept my resignation. I dont want to belong to any club that will accept me as a member. 23 / 44
  24. 24. Anti-Lemons eect In Akerlof s lemons model asymmetric information leads to good sellers leaving the market. Schools are characterized by an anti-lemons eectschools enhance their reputations by selecting the most able students → allocate resources to selectivity rather than value added Students/parents strive to access the most selective schools This explains why parents prefer schools with better peer groups Even with evidence these may have no greater value added 24 / 44
  25. 25. Why do parents and policymakers have dierent views? Policy makers increasingly appreciate that in order to measure school quality, one must take into account the fact that schools are stratied e.g., N.Y.C. and Chile disseminate data approximating school value added However, the anti-lemons eect predicts that parties care about the combination of value added and school selectivity In particular, it may be rational for parents to choose a highly selective school over a non-selective schools with higher value added 25 / 44
  26. 26. Impact upon student eort In a world with selective schools employers use the school attended, as well as individual measures of performance, to choose employees Students eort aects their individual measures, but not the reputation of their school Hence, the more selective the school, the lower the incentive to work This eect is particularly strong for individuals who are negatively selected into the worst schools Can explain why competition does not increase overall performance? 26 / 44
  27. 27. Outline1 Introduction2 Competition and test productivity: The evidence3 Incentives writ large and the anti-lemons eect4 Why is education dierent from other markets?5 Policy implications6 Conclusion 27 / 44
  28. 28. Why did Friedmans prediction fail? Education is not like a Samosa: There is no well dened notion of education as a product Students are more like employees than consumers; they are motivated by the long run returns to education → Policy prescriptions dier from standard market-based prescriptions 28 / 44
  29. 29. What is a good? A good is something that can be delivered at a particular time and for which there is a well dened performance obligation Macleod (2007) JEL paper on goods and contracts When there is a well functioning legal system, a buyer can ask a seller to be compensated for the delivery of a defective product When legal enforcement is weak, then reputations can act as a substitute for a legally binding agreement 29 / 44
  30. 30. Education as a good In the case of education how would one dene performance? If a school does not deliver how would a court enforce the promise of a good quality education? Even in the U.S. there are no cases in which parents have successfully sued to be compensated for the supply of low quality education (though some have tried!) Bottom line: if the quality of education cannot be ensured via the legal system, then there is no reason to expect Friedmans argument to work (Note: health care is dierentin many cases its quality IS legally enforceable!) 30 / 44
  31. 31. Education as employment Education is more like an employment relationship: Students/employees are required to attend with regular hours Students/employees are expected to study/work Students/employees are regularly evaluated by teacher/employers 31 / 44
  32. 32. However, there are dierences Student/employees can almost never be red: Public schools are the suppliers of last resort Many observers claim that the inability to re teachers explains schools poor performance The same logic presumably applies to students? Students/employees are not paid → rewards for hard work must come from other sources 32 / 44
  33. 33. Outline1 Introduction2 Competition and test productivity: The evidence3 Incentives writ large and the anti-lemons eect4 Why is education dierent from other markets?5 Policy implications6 Conclusion 33 / 44
  34. 34. Basic goals Traditionally, the Economics of Education focuses only upon schools role is producing skills (e.g., textbooks or teacher incentives) Our analysis suggests that school system performance depends both upon schools and students Recognizes that students are like employees Hence school performance depends upon both school value added and managing expectations regarding future rewards for students In brief - if students have no future, then no matter how good the school, they will not drink from the fountain of knowledge (Bishop (2006)) 34 / 44
  35. 35. Example - Higher education There are many more college educated individuals in richer countries. For example, consider Ghana, Tanzania, and the U.S. per capita incomes (PPP) of $2,900, $1,400 and $47,000 respectively We do not have good wage data for Africa, however using IPUMS data (Integrated Public Use Microdata Series, International) we can look at the relationship between education and occupations 35 / 44
  36. 36. Fraction of pop. with some post-secondary education 36 / 44
  37. 37. What might we conclude? The fact that there is a lack of highly educated individuals might suggest that becoming rich simply requires more education Certainly, many economists point to the high returns to education and conclude that more individuals should get more education, and as a consequence the economy will be richer Consider now the perspective of an individual thinking about college First, in Africa college attendance is low compared to the U.S From the individuals perspective this means that it is going to be hard to get a college education Second, given that one has a college education then what sort of work will one nd? 37 / 44
  38. 38. Occupation choices for individuals with some college 38 / 44
  39. 39. Hope? The dierences in distribution by occupation between these countries is striking. Notice the fraction of individuals NIUthese are individuals who at the time of interview were unemployed or otherwise out of the labor market In Ghana and Tanzania there is a 30% chance of being NIU! Given this data a rational student might think twice about pursuing a degree Notice that this number is also quite high for the U.S.partially this reects women leaving for child rearing (see the recent work by Golden and Katz using the Harvard and Beyond data) 39 / 44
  40. 40. Education and Labor Force Participation 40 / 44
  41. 41. Outline1 Introduction2 Competition and test productivity: The evidence3 Incentives writ large and the anti-lemons eect4 Why is education dierent from other markets?5 Policy implications6 Conclusion 41 / 44
  42. 42. Implications: School market design Main implications highlight the need for: 1 Mechanisms aligning student expectations with labor market outcomes 2 Mechanisms aligning schools reputation with their value added Open enrollment + admissions lotteriese.g., U.S. for charter schools National graduation exams that may be used by employers Provide signals to students on the relationship between achievement and employment Allow employers to know more about employee ability Track the outcomes of students by ability, to guide policy Policies that improve the matching process also mitigate the anti-lemons eectentry of selective schools whose only goal is to attract the best students 42 / 44
  43. 43. Resource-focused policies Solid research shows certain inputs raise learning (e.g. Krueger, 1999, and Angrist and Lavy, 1999; Banerjee et al., 2007) The broader picture, however, is one of school productivity decline (e.g. Hoxby, 2002 and Pritchett, 2003) Resource-focused policies may lead to greater school value added, but: They may disappoint if broader incentives for parental/student eort do not change They may be a poor investment if there is not a corresponding increase in labor market demand for skills 43 / 44
  44. 44. Conclusions Education is not like a samosa Anti-Lemons eect: Schools can build reputations by selecting students rather than by providing the best education Students choices and incentives are guided by the past experiences of individuals with similar test scores and backgrounds Government can help link labor markets and schools by enhancing information regarding individual capabilities 44 / 44

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