Class Size and Sorting in Market Equilibrium: Theory and Evidence

56 Pages Posted: 29 Aug 2007

See all articles by Miguel S. Urquiola

Miguel S. Urquiola

Columbia University

Eric A. Verhoogen

Columbia University - School of International & Public Affairs (SIPA); IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: July 2007

Abstract

This paper examines how schools choose class size and how households sort in response to those choices. Focusing on the highly liberalized Chilean education market, we develop a model in which schools are heterogeneous in an underlying productivity parameter, class size is a component of school quality, households are heterogeneous in income and hence willingness to pay for school quality, and schools are subject to a class-size cap. The model offers an explanation for two distinct empirical patterns observed among private schools that accept government vouchers: (i) There is an inverted-U relationship between class size and household income in equilibrium, which will tend to bias cross-sectional estimates of the effect of class size on student performance. (ii) Some schools at the class size cap adjust prices (or enrollments) to avoid adding another classroom, which produces stacking at enrollments that are multiples of the class size cap. This generates discontinuities in the relationship between enrollment and household characteristics at those points, violating the assumptions underlying regression-discontinuity (RD) research designs. This result suggests that caution is warranted in applying the RD approach in settings in which parents have substantial school choice and schools are free to set prices and influence their enrollments.

Keywords: class size, sorting, regression discontinuity

JEL Classification: I2, O1, C2, L1

Suggested Citation

Urquiola, Miguel S. and Verhoogen, Eric A., Class Size and Sorting in Market Equilibrium: Theory and Evidence (July 2007). IZA Discussion Paper No. 2963, Available at SSRN: https://ssrn.com/abstract=1010605 or http://dx.doi.org/10.2139/ssrn.1010605

Miguel S. Urquiola

Columbia University ( email )

420 W. 118th Street
New York, NY 10027
United States

Eric A. Verhoogen (Contact Author)

Columbia University - School of International & Public Affairs (SIPA) ( email )

420 West 118th Street
New York, NY 10027
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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