McMillan, R., (2004)

‘Competition, incentives and public school productivity.’

Journal of Political Economy 88, pp. 1871-1892

• Creates a simple model in which public schools find it optimal to reduce quality in the face of increased competition.
• While other papers find that competition may reduce public school quality through adverse peer effects, McMillan’s paper abstracts from peer effects completely.
• In his model, rent-seeking public schools may move ‘down-market’ in response to an increase in competition, reducing effort because private schools will now take the ‘best’ pupils.
• If vouchers are ‘targeted’ (i.e. given only to low-income households), however, the perverse effect disappears; public schools will definitely increase effort.