Preschool Education in Brazil: Does Public Supply Crowd Out Private Enrollment?

Expanding access to preschool education is a particularly important policy issue in developing countries, where enrollment rates are generally much lower, and where private institutions constitute a much larger share of the formal preschool sector, than in developed countries. This paper examines if an expansion in the supply of public preschool crowds-out private enrollment using rich data for municipalities in Brazil from 2000 to 2006, where federal transfers to local governments change discontinuously with given population thresholds. Results from a regression-discontinuity design reveal that larger federal transfers lead to a significant expansion of local public preschool services, but show no evidence of crowding-out of private enrollment, nor of negative impacts on the quality of private providers. This finding is consistent with a theory in which households differ in willingness-to-pay for preschool services, and private suppliers optimally adjust prices in response to an expansion of lower-quality, free-of-charge public supply. In the context of the model, the absence of crowding-out effects of more public preschool providers can be rationalized by the existence of relatively large differences in willingness-to-pay for preschool services across different demand segments. Our theoretical and empirical findings therefore suggest that in developing country settings characterized by relatively high income inequality, an expansion in public preschool supply will likely significantly increase enrollment among the poorest segments of society, and need not have adverse effects on the quantity or quality of local private supply.