Is Education Consumption or Investment? Implications for School Competition

Posted: 4 Sep 2019

Date Written: August 2019


Milton Friedman 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 that this can be rational in a model based on three ingredients that economists have highlighted since Friedman worked on the issue. First, education is an investment into human capital. Second, labor markets can feature wage premia: Individuals of a given skill level may receive higher wages if they match to more productive firms. Third, distance influences school choice and the placements that schools produce. These factors imply that choice alone is too crude a mechanism to ensure the effective provision of schooling.

Suggested Citation

MacLeod, W. Bentley and Urquiola, Miguel S., Is Education Consumption or Investment? Implications for School Competition (August 2019). Annual Review of Economics, Vol. 11, pp. 563-589, 2019. Available at SSRN: or

W. Bentley MacLeod (Contact Author)

Columbia University

3022 Broadway
New York, NY 10027
United States

Miguel S. Urquiola

Columbia University ( email )

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

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