Increased Choice Linked to Higher Educational Quality

Published February 1, 2002

Exercising educational choice in the U.S. generally requires parents to pay private school fees or move to another school district. Is the quality of public (“free”) education affected by the competition from those other schooling options?

Milton Friedman once wrote, “If you’re trying to go into the business of selling chocolate and somebody down the street is taking money from you in order to give chocolates away, then you’ve got a difficult time making a business out of that.”

If a few chocolate-selling businesses did offer “chocolate choice” to consumers under the circumstances described by Friedman, would the severely hobbled competition that resulted have any effect on the quality of the free chocolate?

A recent study from the National Center for the Study of Privatization in Education concludes that increased competition, even under such disadvantaged circumstances, does improve educational quality, though by only a modest amount. The study makes the obvious point that increasing the level of competition under such uncompetitive circumstances would be difficult, and notes policymakers are unlikely to pursue competitive reforms since the resulting payoff in educational quality is relatively small.

The study, “The Effects of Competition on Educational Outcomes,” was conducted by Clive R. Belfield and Henry M. Levin, a professor of economics and education at Columbia University Teachers College and also the Center’s director. Belfield is the Center’s research director.

Belfield and Levin examined more than 35 research studies that tested the effects of competition–from other school districts and from private schools–on such educational outcomes as student test scores, graduation rates, educational expenditures, and teacher quality. No voucher studies were included in their analysis.

Two important educational outcomes were omitted from the review: changes in parental involvement, and measures of satisfaction with schooling. Parental involvement is seen by experts as the key to improving the nation’s public schools, and a recent RAND study reported “substantially higher levels” of parental satisfaction in voucher schools compared to public schools. (See “RAND Study Grudgingly Reveals Good News About Choice,” page 1.)

Beneficial Effects of Competition

A sizable majority of the studies reviewed by Belfield and Levin report beneficial effects of competition. The following relationships between competition and educational outcomes were identified:

  • Academic test scores in public schools rise with increases in competition;
  • Graduation rates increase with increased competition;
  • Education spending is lower with increased competition;
  • Educational efficiency is higher with increased competition;
  • Teacher quality, as indicated by measures such as student-teacher ratios, is higher with increased competition;
  • Teacher salaries are higher with increased competition;
  • Housing prices are higher with increased competition;
  • Adults’ wages increase with increased competition.

“The above evidence shows reasonably consistent evidence of a link between competition (choice) and education quality,” report Belfield and Levin, after reviewing all the studies. “Increased competition and higher educational quality are positively correlated,” they conclude, noting this conclusion is “highly plausible” to an economist.

While many economists, including Belfield and Levin, believe market competition improves the efficiency of resource allocation, the scale and generality of those efficiency gains is less clear–or well-accepted–in the education arena. The study was undertaken to review the substantial body of research that has been done on competition in K-12 education and to answer the question: “How much and according to what measures of output does increased competition improve educational quality?”

Defining Markets, Measuring Competition

The review focuses on the link between educational outcomes and competitive pressures across large markets. One reason for looking at large-scale, cross-sectional evidence, explain the authors, is that “there is some concern over the external validity of small-scale voucher programs.”

Belfield and Levin acknowledge that in these larger markets–where there are no vouchers or tuition tax credits–parental choice comes with very substantial disincentives: “[P]arents choosing a private school incur tuition fees; parents choosing a different public school may incur residential re-location costs, or costs of appealing to the school district for reassignment,” note the authors.

“Competition” in the context of this study thus means parents have a choice of education suppliers, not that they have a cost-free choice among those suppliers.

One measure of competition is the share of school enrollments achieved by private schools. Another measure is the Herfindahl Index, which typically refers to public school choices, either within the district or across districts.

Bounded between full competition at 0 and monopoly at 1.0, the Herfindahl Index is calculated as the sum of squares of per-unit enrollments over total enrollments. In the education markets reviewed, the Herfindahl Index values range from 0.11 to 0.87, with an approximate average of 0.35.

“Broadly, these index values indicate education is highly concentrated compared to other sectors,” report Belfield and Levin. For example, the Federal Trade Commission defines industrial markets with Herfindahl Index values below 0.1 as unconcentrated; between 0.1 and 0.18 as moderately concentrated; and above 0.18 as concentrated.

Policy Implications

What are the policy implications of the study’s major finding: “Educational outcomes are higher in more competitive markets”?

The results suggest increasing the competition for students among public and private schools may improve educational effectiveness, efficiency, and other desired outcomes.

For such a policy to be practical and desirable, Belfield and Levin argue that, first, the aggregate benefits must be large; second, those benefits “must be set against any increases in costs that are required to boost competition in education.” Their study did not address, however, the possibility of cost increases from increasing competition.

The benefits of competition were estimated by examining how much the benefits changed when the measure of competition in the studies was increased by one standard deviation. Test scores of public school students, for example, would increase by approximately one-tenth of a standard deviation when the competition measure was increased by one standard deviation. The authors note that privately funded voucher programs and the Tennessee class size experiment found effects approximately twice as large.

Belfield and Levin caution that reforms to effect a one standard deviation increase in competition may not be feasible in the large markets they studied, where choice is effectively penalized. They point out, for example, that increasing the number of school districts would require “substantial structural reform.” Even if effected, such a reform would still penalize competition, requiring parents to move to a new place of residence in order to change schools.

The authors also point out the proportion of students in private schools in the U.S. has remained reasonably static–ranging only from 9.04 to 12.13 percent–from the late 1940s to the early 1980s. The tiny year-to-year increase suggests the percentage of students in private schools is likely to increase only very slowly in the present competitive environment.

Belfield and Levin contend private school enrollments would increase very slowly even if vouchers or tuition tax credits were introduced into the K-12 education market. That claim is not supported by their analysis, however, as no voucher studies were included among those they reviewed.

Unlike the competitive reforms studied in the reports Belfield and Levin analyzed, vouchers and tax credits change the nature of the competitive environment by removing the substantial cost penalty parents presently incur for exercising school choice. Thus, a more appropriate basis for predicting changes in private school enrollment in a competitive environment including vouchers and tax credits would be data for Milwaukee, Wisconsin, during the 1980-2001 period.


For more information . . .

The full text of Occasional Paper No. 35, the 68-page report by Clive Belfield and Henry Levin issued March 2002, is available in Adobe Acrobat’s PDF format from the Web site of the National Center for the Study of Privatization in Education. Point your Web browser to An abstract of the paper is available at