The Equilibrium Impacts of Unconditional Grants to Private Schools

As market-based provision gains importance in education, addressing market failures can have substantial impact. This paper alleviates one such failure - access to finance - by experimentally allocating capital to 855 private schools across 266 villages in rural Pakistan. We provide either a `Low saturation' (L) treatment where only one private school in the village was randomly chosen to receive an unconditional grant of $500, or a `High saturation' (H) treatment, where all private schools received $500 each. Treated schools in the L arm saw substantial increases in revenues due to higher enrollment and investments in physical infrastructure, but show no increase in test scores or fees. In contrast, in the H arm, revenues increased due to both greater enrollment and increased fees. The higher fees accompanied test score increases as schools invested in additional infrastructure and teachers. The differential impact naturally follows from an understanding of the underlying market structure in an oligopolistic setting with capacity constraints and vertical differentiation. In the H arm, capacity expansion is less attractive as competition over a limited student pool may trigger a price-war. Therefore schools are more likely instead to invest in quality. While financial returns exceeded market interest rates in both cases, private returns are higher in the L arm whereas social returns are arguably higher in the H arm. This underscores the importance and appropriate design of public subsidies to the educational sector.