Entry in School Markets: Theory and Evidence from Brazilian Municipalities

This paper develops a theoretical model of private school entry and estimates it using data from Brazilian municipalities. The school market is different from other markets because students are both consumers and inputs in the production fuction of education. There is a benefit to study among good peers. The theoretical model predicts a segregated equilibrium where the better students attend the private schools, rendering these with a better (endogenous) quality than the public ones. Hence, a private institution only needs to attract the best local students to be better than the existing public schools. The model’s main prediction is that educational inequality induces entry. We use a panel data of private school entry in Brazilian municipalities between 1995 and 2000 to estimate an entry model. The econometric results confirm the main theoretical finding: education inequality has a positive effect on entry. A higher degree of inequality increases the private schools’ ability to cream skim the best students. We also observe a decrease in the quality of the public schools, as measured by math and reading test scores, when a private school enters a town.