School Fees and Vouchers when Quality of Education Matters

Alessandro Balestrino; Lisa Grazzini; Annalisa Luporini

doi:10.1515/ger-2023-0058

Article

School Fees and Vouchers when Quality of Education Matters

Alessandro Balestrino , Lisa Grazzini and Annalisa Luporini

Published/Copyright: March 5, 2024

Published by

Become an author with De Gruyter Brill

Submit Manuscript Author Information Explore this Subject

From the journal German Economic Review Volume 25 Issue 1

Abstract

The aim of this paper is to analyse the role that quantity and quality of education may play in the design of public policies. In our model, educated people enjoy a premium on their incomes, and education generates a positive externality for the society. Households live in two areas with different socio-economic characteristics. Altruistic parents choose both the amount and the quality of schooling they want for their children, ignoring the external effect. The latter is, instead, taken into account by the government, which is assumed to provide a composite education service that has a quantity as well as a quality dimension, and is financed mainly via taxes on the income of the parents. We investigate the effects on welfare of balanced-budget policy reforms aimed at introducing or raising i) school fees, and ii) vouchers meant to compensate the costs of attending high-quality schools. We show that, if the external effects are not considered, school fees improve private parental welfare while vouchers do not. Parental altruism is not enough to support high levels of quantity and quality of education. The consideration of social welfare, i.e. inclusive of the impact of the externality, somewhat mitigates the above results, by favouring lower (albeit positive) fees and allowing vouchers to increase social welfare under some circumstances.

Keywords: education policy; redistributive taxation; quality of education

JEL Classification: H42; H52

Corresponding author: Alessandro Balestrino, Department of Political Science and CESifo, University of Pisa, via Serafini 3, 56126 Pisa, Italy, E-mail: alessandro.balestrino@unipi.it

We are very grateful to two anonymous referees, and the editor for helpful comments. We also wish to thank participants in the ASSET 2022 and SIEP 2022 conferences for their fruitful suggestions.

Appendix 1

We want to show that when X¹ − T¹ ≥ X² − T², if interior solutions obtain for both types of households, we always have S¹ > S². If interior solutions obtain, the FOCs (5) can be written as

(29) y S − w i u ′ ( X i − T i − k i + σ i − ϕ S i ) = ϕ β , i = 1,2 .

Suppose that S¹ = S² = S and consider that k¹ = σ¹ = 0 and k² − σ² ≥ 0, implying X¹ − T¹ − ϕS > X² − T² − k² + σ² − ϕS. Moreover recall that w¹ < w². We already assumed that the condition holds as an equality for area-1 households. Then, however, the LHS of (29) would be lower than the RHS for area-2 households, no matter whether they are choosing Q ̲ or Q ̄ . For (29) to hold as an equality also for area-2 households, S² should be lowered so as to raise y_S and to diminish u′(X² − T² − k² + σ² − ϕS²). Thus, S¹ > S².

Appendix 2

We want to show that when X¹ − T¹ ≥ X² − T², then ϕ ̂ 2 < ϕ ̂ 1 . Recall that ϕ ̂ i is the lowest level of ϕ such that the FOCs (5) hold as an equality for a household of type i, implying S¹ = S² = 1. Recall also that σ* is the level of the voucher that makes it optimal for area-2 households to send their kids to school in area 1. We then have

(30) β v ′ y S ( 1 , Q ̄ ) − w 1 = ϕ ̂ 1 u ′ ( X 1 − T 1 − ϕ ̂ 1 ) ,

(31) β v ′ y S ( 1 , Q ̃ ) − w 2 = ϕ ̂ 2 u ′ ( X 2 − T 2 − k + σ 2 − ϕ ̂ 2 ) ,

where Q ̃ = Q ̄ if σ* ≤ σ² < k, and Q ̃ = Q ̲ otherwise. Given our assumptions on y(Sⁱ, Qⁱ), and wⁱ, this implies that y S ( 1 , Q ̄ ) − w 1 > y S ( 1 , Q ̃ ) − w 2 . On the other hand, if it were ϕ ̂ 2 ≥ ϕ ̂ 1 , it would be ϕ ̂ 2 u ′ ( X 2 − T 2 − k + σ 2 − ϕ ̂ 2 ) > ϕ ̂ 1 u ′ ( X 1 − T 1 − ϕ ̂ 1 ) no matter the level of Q ̃ and the two FOCs could not simultaneously hold. Consequently, it must be ϕ ̂ 2 < ϕ ̂ 1 .

Appendix 3

In order to show that parents’ private welfare is always increasing in ϕ when ϕ ̂ ≤ ϕ < γ S , consider that

(32) d W d ϕ ϕ < γ S = n i W i u ′ ∂ B / ∂ ϕ ∂ B / ∂ T i − S i > 0 ,

because

(33) ∂ B i / ∂ ϕ ∂ B i / ∂ T i = S i + ( ϕ − γ S ) ∂ S i ∂ ϕ 1 + ( ϕ − γ S ) ∂ S i ∂ T = S i + ( ϕ − γ S ) u ′ − ϕ S i u ′ ′ β y S S + ϕ 2 u ′ ′ 1 − ( ϕ − γ S ) ϕ u ′ ′ β y S S + ϕ 2 u ′ ′ = S i 1 + ( ϕ − γ S ) u ′ / S i β y S S + ϕ 2 u ′ ′ 1 − ( ϕ − γ S ) ϕ u ′ ′ β y S S + ϕ 2 u ′ ′ > S i .

Given this expression, it is also clear that parents’ private welfare reaches a maximum for ϕ = γ_S when ∂ B / ∂ ϕ / ∂ B / ∂ T i = S i and becomes negative for ϕ > γ_S. However, this does not imply that social welfare will be necessarily improved by an increase in the fee as long as it is less than the marginal production cost, because the cost in terms of the reduced benefits from the externality must also be taken into account. Hence, the level of the fee at which social welfare ceases to increase will be below γ_S and further away from it the stronger is the externality loss.

References

Abdulkadiroğlu, A., P. A. Pathak, and C. R. Walters. 2018. “Free to Choose: Can School Choice Reduce Student Achievement?” The American Economic Journal: Applied Economics 10 (1): 175–206. https://doi.org/10.1257/app.20160634.Search in Google Scholar

Andreoni, J. 1990. “Impure Altruism and Donations to Public Goods: A Theory of Warm-Glow Giving.” The Economic Journal 100: 464–77. https://doi.org/10.2307/2234133.Search in Google Scholar

Angrist, J. D., E. Bettinger, E. Bloom, E. King, and M. Kremer. 2002. “Vouchers for Private Schooling in Colombia: Evidence from a Randomized Natural Experiment.” American Economic Review 92 (5): 1535–58. https://doi.org/10.1257/000282802762024629.Search in Google Scholar

Balestrino, A., L. Grazzini, and A. Luporini. 2017. “A Normative Justification of Compulsory Education.” Journal of Population Economics 30: 537–67. https://doi.org/10.1007/s00148-016-0619-7.Search in Google Scholar

Balestrino, A., L. Grazzini, and A. Luporini. 2021. “On the Political Economy of Compulsory Education.” Journal of Economics 134: 1–25. https://doi.org/10.1007/s00712-021-00735-x.Search in Google Scholar

Becker, G. 1964. Human Capital. New York: Columbia University Press.Search in Google Scholar

Besley, T. 1991. “Welfare Improving User Charges for Publicly Provided Private Goods.” Scandinavian Journal of Economics 93 (4): 495–510. https://doi.org/10.2307/3440225.Search in Google Scholar

Bourguignon, F., and T. Verdier. 2000. “Oligarchy, Democracy, Inequality and Growth.” Journal of Development Economics 62: 285–313. https://doi.org/10.1016/s0304-3878(00)00086-9.Search in Google Scholar

Castelló-Climent, A., and A. Hidalgo-Cabrillana. 2012. “The Role of Educational Quality and Quantity in the Process of Economic Development.” Economics of Education Review 31: 391–409. https://doi.org/10.1016/j.econedurev.2011.11.004.Search in Google Scholar

Chakrabarti, R. 2008. “Can Increasing Private School Participation and Monetary Loss in a Voucher Program Affect Public School Performance? Evidence from Milwaukee.” Journal of Public Economics 92: 1371–93. https://doi.org/10.1016/j.jpubeco.2007.06.009.Search in Google Scholar

Chaudhury, N., and D. Parajuli. 2010. “Conditional Cash Transfers and Female Schooling: The Impact of the Female School Stipend Programme on Public School Enrollment in Punjab, Pakistan.” Applied Economics 42 (28): 3565–83. https://doi.org/10.1080/00036840802167376.Search in Google Scholar

Cunha, F., and J. Heckman. 2007. “The Technology of Skill Formation.” American Economic Review 97 (2): 31–47. https://doi.org/10.1257/aer.97.2.31.Search in Google Scholar

Deininger, K. 2003. “Does Cost of Schooling Affect Enrollment by the Poor? Universal Primary Education in Uganda.” Economics of Education Review 22: 291–305. https://doi.org/10.1016/s0272-7757(02)00053-5.Search in Google Scholar

Economides, G., A. Philippopoulos, and S. Sakkas. 2017. “Tuition Fees: User Prices and Private Incentive.” European Journal of Political Economy 48: 91–103. https://doi.org/10.1016/j.ejpoleco.2016.08.008.Search in Google Scholar

Epple, D., R. E. Romano, and M. Urquiola. 2017. “School Vouchers: A Survey of the Economics Literature.” Journal of Economic Literature 55 (2): 441–92. https://doi.org/10.1257/jel.20150679.Search in Google Scholar

Epple, D., and R. E. Romano. 1998. “Competition between Private and Public Schools, Vouchers, and Peer-Group Effects.” American Economic Review 88 (1): 33–62.Search in Google Scholar

Friedman, M. 1962. Capitalism and Freedom. Chicago: The University of Chicago Press.Search in Google Scholar

Glewwe, P. 2002. “Schools and Skills in Developing Countries: Education Policies and Socioeconomic Outcomes.” Journal of Economic Literature 40 (2): 436–82. https://doi.org/10.1257/002205102320161258.Search in Google Scholar

Glewwe, P., and M. Kremer. 2006. “Schools, Teachers, and Education Outcomes in Developing Countries.” In Handbook of the Economics of Education, II, edited by A. Hanushek, and F. Welch. Amsterdam: North-Holland.10.1016/S1574-0692(06)02016-2Search in Google Scholar

Haaparanta, P., R. Kanbur, T. Paukkeri, J. Pirttila, and M. Tuomala. 2022. “Promoting Education under Distortionary Taxation: Equality of Opportunity versus Welfarism.” Journal of Economic Inequality 20: 298–7. https://doi.org/10.1007/s10888-021-09492-9.Search in Google Scholar

Hanushek, E. A., and D. D. Kimko. 2000. “Schooling, Labor-Force Quality, and the Growth of Nations.” American Economic Review 90 (5): 1184–208. https://doi.org/10.1257/aer.90.5.1184.Search in Google Scholar

Hanushek, E. A., and L. Wossmann. 2021. “Education and Economic Growth.” In Oxford Research Encyclopedia of Economics and Finance. Oxford: Oxford University Press.10.1093/acrefore/9780190625979.013.651Search in Google Scholar

Hanushek, E. A., and L. Wossmann. 2015. The Knowledge Capital of Nations. Education and the Economics of Growth. Cambridge: MIT Press.10.7551/mitpress/9780262029179.001.0001Search in Google Scholar

Hanushek, E. A., and L. Wossmann. 2012. “Do Better Schools Lead to More Growth? Cognitive Skills, Economic Outcomes, and Causation.” Journal of Economic Growth 17 (4): 267–321. https://doi.org/10.1007/s10887-012-9081-x.Search in Google Scholar

Hanushek, E. A., and L. Wossmann. 2011. “The Economics of International Differences in Educational Achievement.” In Handbook in Economics of Education, Vol. 3, edited by A. Eric, H. Machin, and S. L. Wossmann. North-Holland: Elsevier.10.1016/B978-0-444-53429-3.00002-8Search in Google Scholar

Hanushek, E. A., and L. Wossmann. 2008. “The Role of Cognitive Skills in Economic Development.” Journal of Economic Literature 46 (3): 607–68. https://doi.org/10.1257/jel.46.3.607.Search in Google Scholar

Hoxby, C. M. 2003. “School Choice and School Competition: Evidence from the United States.” Swedish Economic Policy Review 10 (2): 9–65.Search in Google Scholar

Hoyt, W. H., and K. Lee. 1998. “Educational Vouchers, Welfare Effects, and Voting.” Journal of Public Economics 69: 211–28, https://doi.org/10.1016/s0047-2727(98)00023-1.Search in Google Scholar

Kautz, T., J. J. Heckman, R. Diris, B. Weel, and L. Borghans. 2014. Fostering and Measuring Skills: Improving Cognitive and Non-Cognitive Skills to Promote Lifetime Success, Report prepared for the Organisation of Economic Co-operation and Development, Paris.10.3386/w20749Search in Google Scholar

Munro, A. 1992. “Self-Selection and Optimal In-Kind Transfers.” Economic Journal 102: 1184–96. https://doi.org/10.2307/2234385.Search in Google Scholar

Muralidharan, K., and V. Sundararaman. 2015. “The Aggregate Effect of School Choice: Evidence from a Two-Stage Experiment in India.” The Quarterly Journal of Economics 130 (3): 1011–66. https://doi.org/10.1093/qje/qjv013.Search in Google Scholar

Nechyba, T. J. 2000. “Mobility, Targeting, and Private-School Vouchers.” American Economic Review 90 (1): 130–46. https://doi.org/10.1257/aer.90.1.130.Search in Google Scholar

Riphahn, R. T. 2012. “Effect of Secondary School Fees on Educational Attainment.” Scandinavian Journal of Economics 114 (1): 148–76. https://doi.org/10.1111/j.1467-9442.2011.01661.x.Search in Google Scholar

Rouse, C. E. 1998. “Private School Vouchers and Student Achievement: An Evaluation of the Milwaukee Parental Choice Program.” The Quarterly Journal of Economics 113 (2): 553–602. https://doi.org/10.1162/003355398555685.Search in Google Scholar

Sandström, F. M., and F. Bergström. 2005. “School Vouchers in Practice: Competition Will not Hurt You.” Journal of Public Economics 89: 351–80. https://doi.org/10.1016/j.jpubeco.2004.03.004.Search in Google Scholar

Schultz, T. W. 1961. “Investment in Human Capital.” American Economic Review 51 (1): 1–17.Search in Google Scholar

Shi, X. 2016. “The Impact of Educational Fee Reduction Reform on School Enrolment in Rural China.” Journal of Development Studies 52 (12): 1791–809. https://doi.org/10.1080/00220388.2016.1156094.Search in Google Scholar

Welsch, D. M., B. Statz, and M. Skidmore. 2010. “An Examination of Inter-District Public School Transfers in Wisconsin.” Economics of Education Review 29: 126–37. https://doi.org/10.1016/j.econedurev.2009.07.008.Search in Google Scholar

Wossmann, L. 2016. “The Importance of School Systems: Evidence from International Differences in Student Achievement.” Journal of Economic Perspectives 30 (3): 3–32. https://doi.org/10.1257/jep.30.3.3.Search in Google Scholar

Wossmann, L., A. B. Bergbauer, and E. A. Hanushek. 2024. “Testing.” Journal of Human Resources 59 (2), forthcoming.10.3368/jhr.0520-10886R1Search in Google Scholar

Received: 2023-05-08

Accepted: 2024-02-08

Published Online: 2024-03-05

Published in Print: 2024-02-26

You are currently not able to access this content.

Articles in the same Issue

https://doi.org/10.1515/ger-2023-0058

Keywords for this article

education policy; redistributive taxation; quality of education