Upping the Ante: The Equilibrium Effects of Unconditional Grants to Private Schools

Abstract

We test for financial constraints as a market failure in education in a low-income country by experimentally allocating unconditional cash grants to either one (L) or to all (H) private schools in a village. Enrollment increases in both treatments, accompanied by infrastructure investments. However, test scores and fees only increase in H along with higher teacher wages. This differential impact follows from a canonical oligopoly model with capacity constraints and endogenous quality: greater financial saturation crowds-in quality investments. Higher social surplus in H, but greater private returns in L underscores the importance of leveraging market structure in designing educational subsidies.

Keywords: Private schools, Financial innovation, Educational Achievement, Education Markets, Return to Capital, SMEs

JEL Classification: I25; I28; L22; L26; O16