Epple, D. & Romano, R., (2003)

‘Neighborhood Schools, Choice, and the Distribution of Educational Benefits’

in Hoxby, C. (ed.), The Economics of School Choice, University of Chicago Press

• Models school choice policies in a general equilibrium framework, similar in spirit to the authors' 1998 paper.
• The model incorporates peer effects – the possibility that students benefit from learning with more able peers. Parents are willing to pay extra to have their children taught with high-ability peers.
• With NO school choice (all students go to their local school), school quality is stratified by neighbourhood. House prices ration access to the best schools, and neighbourhoods stratify by income.
• With free school choice and zero transport costs, the result is equal school quality (and equal house prices) in all neighbourhoods.
• A voucher which can be topped up by parents yields an equilibrium stratified by both income and ability across schools (but not neighbourhoods).
• Higher-income households with lower-ability students will buy their way into private schools by supplementing the voucher.
• Higher ability students, whether of high or low income, will be drawn into private schools with tuition subsidies provided by schools on top of the voucher.