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Information Asymmetry and Equilibrium Monitoring in Education

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  • Maria Marta Ferreyra

    (Carnegie Mellon University)

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    Abstract

    We develop a theoretical and computational model of equilibrium school choice and achievement that embeds information asymmetries in the production of education. School effort is unobservable to households and the policy-maker, leading to moral hazard problems. Although households can monitor school effort, they differ in their ability to do so. Since private schools attract high-ability households, both competition and parental monitoring serve to mitigate (but not eliminate) the under-provision of private school effort. In contrast, the public school attracts low-ability households who free-ride in providing monitoring effort. Lower monitoring and monopoly power induce the public school to under-provide effort. Using our calibrated model, we simulate public monitoring of public schools and private school vouchers. While public monitoring in our simulations increases public school effort and attendance, it can also crowd out private monitoring and hence undermine its own effectiveness. In our simulations, vouchers do not benefit low-income, low-ability households because the monitoring they would need to exercise in private schools is prohibitively costly for them. These findings suggest that since neither monitoring-based policies (such as public school accountability) nor choice-based policies (such as vouchers) eliminate the informational asymmetries that lie at the root of underachievement, an effective program may require a combination of both types of tools rather than reliance on any of them alone.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 1215.

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    Date of creation: 2010
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    Handle: RePEc:red:sed010:1215

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    1. William Blankenau & Gabriele Camera, 2009. "Public Spending on Education and the Incentives for Student Achievement," Economica, London School of Economics and Political Science, vol. 76(303), pages 505-527, 07.
    2. W. Bentley MacLeod & Miguel Urquiola, 2009. "Anti-Lemons: School Reputation and Educational Quality," NBER Working Papers 15112, National Bureau of Economic Research, Inc.
    3. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
    4. Steven Huddart & Pierre Jinghong Liang, 2003. "Accounting in Partnerships," American Economic Review, American Economic Association, vol. 93(2), pages 410-414, May.
    5. Huddart, Steven & Liang, Pierre Jinghong, 2005. "Profit sharing and monitoring in partnerships," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 153-187, December.
    6. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
    7. Caroline M. Hoxby, 2002. "The Cost of Accountability," NBER Working Papers 8855, National Bureau of Economic Research, Inc.
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