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Information asymmetry and equilibrium monitoring in education

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  • Ferreyra, Maria Marta
  • Liang, Pierre Jinghong

Abstract

We develop a theoretical and computational model of school choice and achievement that embeds information asymmetries in the provision of education. Because school effort is unobservable to households and policymakers, schools have an incentive to under provide effort. This moral hazard affects both public and private schools, although public schools are subject to an additional distortion because of limited competition and fixed funding. Household monitoring of schools can mitigate moral hazard, but some households may free-ride on the monitoring of others. Using our calibrated model we simulate two policies aimed at raising achievement: public monitoring of public schools and private school vouchers. Our results indicate that in large scale settings no single tool may suffice. The reason is twofold: a) no tool raises achievement or welfare for all households; and b) since the extent of moral hazard is endogenous, the application of each tool has unintended consequences that limit its own effectiveness. Results also indicate that setting the policy parameters for public schools at the levels preferred by the majority of households may mitigate the distortions. Nonetheless, the current actual values of these parameters seem to match more closely the preferences of public schools than the preferences of parents.

Suggested Citation

  • Ferreyra, Maria Marta & Liang, Pierre Jinghong, 2012. "Information asymmetry and equilibrium monitoring in education," Journal of Public Economics, Elsevier, vol. 96(1), pages 237-254.
  • Handle: RePEc:eee:pubeco:v:96:y:2012:i:1:p:237-254
    DOI: 10.1016/j.jpubeco.2011.07.012
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    Cited by:

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    2. Richard Cebula & Franklin Mixon & Mark Montez, 2015. "Teachers’ salaries and human capital, and their effects on academic performance: an institution-level analysis of Los Angeles County high schools," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(2), pages 347-356, April.
    3. Nirav Mehta, 2017. "Competition In Public School Districts: Charter School Entry, Student Sorting, And School Input Determination," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58(4), pages 1089-1116, November.
    4. Gallego Francisco, 2013. "When Does Inter-School Competition Matter? Evidence from the Chilean “Voucher” System," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 13(2), pages 525-562, August.
    5. Dennis Epple & Richard E. Romano & Miguel Urquiola, 2017. "School Vouchers: A Survey of the Economics Literature," Journal of Economic Literature, American Economic Association, vol. 55(2), pages 441-492, June.
    6. Juan Bautista Abello-Romero & Daniel López & Francisco Ganga & Claudio Mancilla, 2021. "Perceptions on Regulation and Asymmetry of Information as Critical Factors in University Governance in Latin America," SAGE Open, , vol. 11(2), pages 21582440211, June.
    7. Maria Marta Ferreyra & Ciro Avitabile & Javier Botero Álvarez & Francisco Haimovich Paz & Sergio Urzúa, 2017. "At a Crossroads," World Bank Publications - Books, The World Bank Group, number 26489, December.
    8. Chakrabarti Rajashri, 2013. "Impact of Voucher Design on Public School Performance: Evidence from Florida and Milwaukee Voucher Programs," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 13(1), pages 349-394, January.

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    More about this item

    Keywords

    Information asymmetry; Monitoring; Equilibrium; School effort; Accountability; Vouchers;
    All these keywords.

    JEL classification:

    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • H44 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Goods: Mixed Markets
    • I21 - Health, Education, and Welfare - - Education - - - Analysis of Education

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