Good Principals or Good Peers? Parental Valuation of School Characteristics, Tiebout Equilibrium, and the Incentive Effects of Competition among Jurisdictions

Good Principals or Good Peers? Parental Valuation of School Characteristics, Tiebout Equilibrium, and the Incentive Effects of Competition among Jurisdictions By J ESSE M. R OTHSTEIN * School choice policies may, by aligning admin- istrators’ incentives with parental demand, yield improved efficiency in educational production (Milton Friedman, 1962; John E. Chubb and Terry M. Moe, 1990). But Eric A. Hanushek (1981) cautions: “If the efficiency of our school systems is due to poor incentives for teachers and admin- istrators coupled with poor decision-making by consumers, it would be unwise to expect much from programs that seek to strengthen ‘market forces’ in the selection of schools” (p. 35, empha- sis added). Poor decision-making is not required; parents may rationally choose schools with “pleasant surroundings, athletic facilities, cultural advantages” (ibid., p. 34) over those that most efficiently pursue academic performance; they may prefer poorly run schools with good peer groups over those that are more effective but en- roll worse students (J. Douglas Willms and Frank H. Echols, 1992, 1993); or they may simply be unable to identify effective schools (Thomas J. Kane and Douglas O. Staiger, 2002). Any factor that leads parents to choose any but the most effective available schools will tend to dilute the incentives for efficient management that choice might otherwise create. This study examines the distribution of stu- dent outcomes across schools within metropol- itan housing markets for evidence on parental demand. Economists have long noted that par- ents’ choices among residential locations are potentially informative about how more com- plete choice systems may operate (Charles M. Tiebout, 1956; Melvin V. Borland and Roy M. Howsen, 1992; Caroline M. Hoxby, 2000; Rothstein, 2005). 1 I ask whether school effec- tiveness plays a sufficiently important role in these decisions to create meaningful incentives for more productive school management. I adopt a specific understanding of “effective- ness” appropriate to the question at hand. A substantial portion of between-school differ- ences in student performance can be attributed to differences in student body composition. This portion includes the effects of individual stu- dent characteristics on their own test scores, any direct peer group effects, and any indirect ef- fects of a school’s composition on the quality of its instruction. If wealthy schools attract better teachers (Joseph R. Antos and Sherwin Rosen, 1975) or more parental involvement, this is for my purposes a peer effect; it depends on the quality of the school’s administration only via school composition. A school administrator cannot attract demand by offering a school with wealthy students, as these can be offered only if wealthy families demand the school in the first place. Only the remaining portion of a school’s contribution to test scores is “effectiveness.” 2 * Department of Economics and Woodrow Wilson School, Princeton University, Wallace Hall, 3 rd Floor, Princeton, NJ 08544 (e-mail: jrothst@princeton.edu). I thank Alan Auerbach, Tom Davidoff, Caroline Hoxby, Jus- tin McCrary, Rob McMillan, John Quigley, Cecilia Rouse, Emmanuel Saez, Till von Wachter, four anonymous refer- ees, editor Robert Moffitt, seminar participants at several institutions, and especially David Card for helpful sugges- tions. I am grateful to the College Board for essential data, and to a National Science Foundation Graduate Research Fellowship and the Fisher Center for Real Estate and Urban Economics at UC Berkeley for funding. See Cecilia Elena Rouse (1998), Julie B. Cullen et al. (2005), William G. Howell et al. (2002), and Alan B. Krueger and Pei Zhu (2004) for analyses of several existing nonresidential choice programs, though none focuses on the particular issue studied here. This definition avoids the need to find observable de- terminants of effectiveness, which have proved elusive (Hanushek, 1986). My definition, however, ignores a school’s contribution to nontest outcomes (e.g., sports or music). If such outcomes motivate parental choices, I will conclude that parents do not demand effective schools. Of