The economics of school reform.

• Author: Hoxby, Caroline M.

Structural reforms for elementary and secondary (K-12) schools are being seriously debated these days. The majority of U.S. states have now enacted at least some form of choice among public schools, for example a charter school program, open enrollment among school districts, or choice within the district. While state legislatures have been much less inclined to enact programs such as vouchers and tax incentives that increase parents' ability to choose private schools, private donors particularly like voucher programs.(1)

In addition, there have been major changes in the structure of public school finance in America over the last 30 years. Increasingly, school finance has been centralized at the state level and has been affected strongly by "school finance equalization" (a term that encompasses a variety of methods for redistributing monies from "property-rich" to "property-poor" school districts).(2)

It is clear why Americans are so interested in structural school reform for K-12 education. On a per-pupil basis, American public education is the most expensive system in the world. Yet, American K-12 students perform only moderately well on international tests of mathematics, science, and language arts achievement. The per-pupil expense for K-12 education has grown by nearly 80 percent (after adjusting for inflation) since 1970, yet student achievement has been almost fiat over the period.(3) Since 1970, most states' school finance systems have been revised in order to target more funds to disadvantaged students. As a result, differences in funding have narrowed, but there has been very little narrowing of the differences in the outcomes of students from advantaged and disadvantaged backgrounds.(4)

There are three reasons why economics is valuable for the analysis of school reform. First, econometric methods and evaluation techniques developed over the last decade (especially in labor and public economics) are very useful for analyzing school reforms. Second, many of the puzzles in K-12 schooling are related to financing, and most structural school reforms are loosely based on economic arguments. For instance, school choice is related to the competitive-market metaphor, and school finance equalization is based loosely on progressive taxation of income and wealth. These arguments (and the related policies) need to be made rigorous and subjected to empirical examination.

Third, economists broadly agree that educational systems ought to solve the problem of investment in human capital, which involves some capital market failures and spillovers.(5) This consensus is important because it facilitates analytic progress. In contrast, popular and legal debates about education often become mired in struggles over whether it is best to maximize enrollment, maximize achievement, maximize the equality of achievement among students, or do something else entirely. In my own work on school reform, I have attempted to bring all three advantages of economics to bear: modern empirical methods, rigorous economic argument, and a consistent focus on solving the human capital investment problem.

Empirical Evidence on School Choice

Analysis of the various reforms should begin with the two basic, traditional forms of school choice in the United States: choice among public school districts and choice between public and private schools. These two existing options give certain parents a substantial degree of choice, and the effects of their choices are useful for predicting the effects of other reforms. Moreover, empirical evidence on how traditional choice affects students is the only way we can learn about the general equilibrium and long-term effects of school choice.

For instance, several studies (including one I am conducting) are currently evaluating charter and voucher schools, using randomized "treatment" and "control" groups of students.(6) These studies can inform us about the effects of voucher or charter schools only on those students who actually use them. The studies tell us nothing about the effects that a widespread voucher or charter school policy would have on public school attendance or on how public schools would respond to competition. But analysis of the two traditional forms of choice does inform us about these crucial issues. Furthermore, school choice reforms are always layered on top of traditional choice, and households will make different decisions about traditional choices as the reforms are added.

Evidence on Choice Among Public School Districts

Choice among public school districts occurs when households can pick their residences. To analyze the effects of such choice, I compare metropolitan areas among which there are long-term differences in parents' ability to choose a school district? Ease of choice depends both on the number of districts in the area and on the evenness with which enrollment is spread over those districts. Choice is easier in a metropolitan area in which parents choose among 20 districts of equal size than in an area where three-quarters of enrollment falls into one of 20 districts, which in turn is easier than in an area with only one school district.

Great variation exists among metropolitan areas in the degree of choice that is available. For instance, Boston has 70 school districts within a 30-minute commute of the downtown area, while the much larger Miami metropolitan area has only one school district (Dade County). These differences are largely a result of history and geography, but a district's enrollment can also reflect its success: an efficient district attracts a disproportionate share of metropolitan area enrollment and gets other districts to consolidate with it. In simple comparisons among metropolitan areas, this introduces a bias against finding that greater choice among districts has positive effects.

To obtain unbiased estimates, I identify geographic and historical factors that increase a metropolitan area's tendency to contain many, small, independent school districts but that are unrelated to contemporary public school quality. For example, I use the fact that metropolitan areas with more streams have more natural barriers and boundaries; because they increase students' travel time to school, they may cause the lines drawn to define smaller districts. The resulting (IV) estimates based on cross-section data (including rich demographic data on each school) allow me to identify the causal effect of greater availability of public school districts, while controlling for a wide range of background variables and differentiating the effects of choice on self-segregation.

I find that a one standard deviation change in a Herfindahl index of enrollment concentration, which corresponds to a substantial increase of choice among districts (for instance the difference between having 4 and 100 equal-sized districts) causes a statistically significant but small (2 percentile points) improvement in students' reading and math scores.(8) However, school efficiency improves dramatically, because the same increase in choice causes schools' per-pupil costs to fall by 17 percent. The powerful implications occur because the...