NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Is Education Consumption or Investment? Implications for the Effect of School Competition

W. Bentley MacLeod, Miguel Urquiola

NBER Working Paper No. 25117
Issued in October 2018, Revised in April 2019
NBER Program(s):Development Economics, Economics of Education, Labor Studies

Friedman (1955) argued that giving parents freedom to choose schools would improve education. His argument was simple and compelling because it extended results from markets for consumer goods to education. We review the evidence, which yields surprisingly mixed results on Friedman’s prediction. A key reason is that households often seem to choose schools based on their absolute achievement rather than their value added. We show this can be rational in a model based on three ingredients economists have highlighted since Friedman worked on the issue. First, education is an investment into human capital (Becker, 1964). Second, labor markets can feature wage premia: individuals of a given skill level may receive higher wages if they match to more productive firms (Card et al., 2018). Third, distance influences school choice and the placements schools produce (Abdulkadiroglu et al., 2017, Weinstein, 2017). These imply that choice alone is too crude a mechanism to ensure the effective provision of schooling.

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Document Object Identifier (DOI): 10.3386/w25117

 
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