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Epple, D. & Romano, R. E. (1998)
‘Competition Between Private and Public Schools, Vouchers and
Peer Group Effects’
American Economic Review 88, No. 1, pp. 33-62
- Provides a model of ‘cream-skimming’ by private schools,
modelling competition between public and private schools both with and
without vouchers.
- A school’s quality in this model is determined exclusively
by the mean ability of its peer group (per-pupil spending is assumed
to be equal
in all schools).
- Because able pupils bestow a positive externality on
other students, private schools link the price they charge an individual
to her characteristics
(ability & income) by offering means-tested scholarships and bursaries.
- This leads to the main theoretical result obtained by Epple & Romano
- that, if an equilibrium exists, then it is hierarchical. The most
expensive private school will attract the highest ability and highest
income students.
Then private schools of descending quality will divide up students
of lower ability and/or income.
- The public school(s) in this model
act as a residual, taking in the poorest and least able pupils.
- Introducing
vouchers causes the number of private schools to increase.
- Students
who switch from public to private school as a result of vouchers definitely
gain in achievement, though some may actually
be made worse
off (as the voucher reduces the quality of their outside option,
the public school).
- Students who remain in the public school, however,
are made unambiguously worse off, as the quality of their peer group
has fallen.
- As schools do not respond positively to competition in this
model, it is a pure model of cream-skimming.
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