Is Education Consumption or Investment? Implications for the Effect of School Competition

37 Pages Posted: 8 Oct 2018

See all articles by W. Bentley MacLeod

W. Bentley MacLeod

Columbia University - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Miguel S. Urquiola

Columbia University

Date Written: October 2018

Abstract

Friedman (1955) argued that giving parents freedom to choose schools would improve education. His argument was simple and compelling because it extended results from markets for consumer goods to education. We review the evidence, which yields surprisingly mixed results on Friedman’s prediction. A key reason is that households often seem to choose schools based on their absolute achievement rather than their value added. We show this can be rational in a model based on three ingredients economists have highlighted since Friedman worked on the issue. First, education is an investment into human capital (Becker, 1964). Second, labor markets can feature wage premia: individuals of a given skill level may receive higher wages if they match to more productive firms (Card et al., 2018). Third, distance influences school choice and the placements schools produce (Abdulkadiroglu et al., 2017, Weinstein, 2017). These imply that choice alone is too crude a mechanism to ensure the effective provision of schooling.

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Suggested Citation

MacLeod, William Bentley and Urquiola, Miguel S., Is Education Consumption or Investment? Implications for the Effect of School Competition (October 2018). NBER Working Paper No. w25117. Available at SSRN: https://ssrn.com/abstract=3262352

William Bentley MacLeod (Contact Author)

Columbia University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics ( email )

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Miguel S. Urquiola

Columbia University ( email )

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

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