Quantifying the Supply Response of Private Schools to Public Policies

Public school policies that cause a large demand shift between public and private schooling may cause some private schools to enter or exit the market. This private school supply response further alters students’ choices and likely amplifies the policy’s effect. Thus, the policy effects under a fixed versus a changing market structure may be very different. To study this difference, we consider New York City’s Fair Student Funding reform, which changed the budgets of the city’s public schools starting in the 2007-08 school year. We find that relative to the schools that did not receive additional funding, elementary public schools that benefited from the reform saw an estimated increase in enrollment of 6.5%. We also find evidence of private school exit in response to the reform by comparing private schools located close to or far from public schools that received additional funding. A private school located next to a public school that received an average (6%) increase in its budget was an estimated 1.5 percentage points, on a base of 12%, more likely to close in the subsequent two years. We estimate a concise model of demand for and supply of private schooling and estimate that 30% of the total enrollment increase came from increased private school exit and reduced private school entry. Finally, we assess the reform’s impact on aggregate achievement. We find that while the reform improved school quality at the public schools that received additional funding, the sorting of some students from private to public schools led them to lower-quality schools. This sorting undid much of the reform’s positive achievement effect.