Can Increasing Private School Participation and Monetary Loss in a Voucher Program Affect Public School Performance? Evidence from Milwaukee

The Milwaukee voucher program, as implemented in 1990, allowed only non- sectarian private schools to participate in the program. Following a Wisconsin Supreme Court ruling, the program saw a major shift and entered into its second phase, when religious private schools were allowed to participate for the first time in 1998. This led to more than a three-fold increase in the number of private schools and almost a four-fold increase in the number of choice students. Moreover, due to some changes in funding provisions, the revenue loss per student from vouchers increased in the second phase of the program. This paper analyzes, both theoretically and empirically, the impacts of these changes on public school performance in Milwaukee. It argues that voucher design matters and that the choice of parameters in a voucher program is crucial as far as impacts on public school incentives and performance are concerned. In the context of a theoretical model of public school and household behavior, the paper establishes that the policy changes will lead to an improvement of the public schools in the second phase of the program as compared to the first phase. Following Hoxby (2003a, 2003b) in treatment-control group classification, using data from 1987 to 2002, and a difference-in-differences estimation strategy in trends, the paper then shows that the theoretical prediction is validated empirically. This result is robust to alternative samples and specifications, and survive robustness checks including correcting for mean reversion.