RISE Working Paper 18/023 - Upping the Ante: The Equilibrium Effects of Unconditional Grants to Private Schools

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Selcuk Ozyurt
,
Niharika Singh
©EPoDHarvard Flickr

We test for financial constraints as a market failure in education in a low-income country by experimentally allocating unconditional cash grants to either one (L) or to all (H) private schools in a village. Enrollment increases in both treatments, accompanied by infrastructure investments. However, test scores and fees only increase in H along with higher teacher wages. This differential impact follows from a canonical oligopoly model with capacity constraints and endogenous quality: greater financial saturation crowds-in quality investments. Higher social surplus in H, but greater private returns in L underscores the importance of leveraging market structure in designing educational subsidies.

 

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