Education Vouchers, the Peer Group Problem, and the Question of Dropouts

This paper extends the analysis of Epple and Romano (1998a, b), who argue that vouchers encourage private schools to “skim the cream off” public schools. Because the education received by students depends on the quality of their classmates, this loss reduces the quality of education received by those remaining in the public system—the peer group effect. In our model, vouchers allow low‐income students to escape the frustration of having to conform to the uniformity of the public school system. Ultimately, the size of the dropout effect relative to the peer group effect is an empirical question. Nevertheless, to the extent that voucher use reduces the student dropout rate, the peer group externality becomes insufficient in itself to prevent reconsideration of a voucher system on equity as well as efficiency grounds.