The Equilibrium Effects of Public Provision in Education Markets: Evidence from a Public School Expansion Policy

Abstract

In markets with private options, the optimal level of public provision may require balancing a tradeoff between reducing private options’ market power with the possibility of crowding out potentially high-quality products. We study the equilibrium effects of public education provision in the Dominican Republic, where the government aimed to increase the number of public school classrooms by 78% over a four-year period. We use an event study framework to estimate the effect of a new public school on local outcomes, where we instrument for how quickly the public school construction project finished with when the project was assigned. We estimate that despite increasing local students’ hours of instruction, a new public school does not have an effect on local students’ test scores. But this null result hides considerable changes in students’ schooling options. We find that a new public school increased public sector enrollment significantly. As public enrollment increased, a large number of private schools closed while the surviving schools lowered prices and increased school quality. To study whether different levels of public provision may have had non-zero effects on student achievement, we specify and estimate an empirical model of demand (students choosing schools) and supply (schools choosing whether to enter, stay open, and what price to charge). We use the model estimates to calculate the level of public provision that maximizes learning. Due to equilibrium competitive effects, we find that the optimal level is non-monotonic in the quality of the increased public schooling.