_2_ results from the small and medium enterprises (SME) literature will extend to education (Banerjee and Duflo, 2012; de Mel et al., 2012).<sup>3</sup> Second, our design allows us to assess whether the nature of financing— in our case, the extent of market saturation with unconditional grants— a↵ects equilibrium outcomes. This saturation design is motivated by our previous research documenting the role of market competition in determining supply-side responses (Andrabi et al., 2017) as well as concerns that the return on funds may be smaller if all firms in the market receive financing (Rotemberg, 2014). Intervening experimentally in this manner thus presents a unique opportunity to better understand school reactions to changes in access to finance and link them to models of firm behavior and financial access in the literature on industrial organization.

We start with two main results. First, the provision of the grant leads to greater expenditures in both treatment arms with no evidence that treated schools in either arms used the grant to substitute away from more expensive forms of capital, such as informal loans to the school owner’s household. Following Banerjee and Duflo (2012), this suggests the presence of credit constraints in our setting. It also confirms that the money was used to make additional investments in the school even though the cash grants were unconditional.

Second, school responses di↵er across the two treatment arms. In the _L_ arm, treated ( _L_<sup>_t_</sup> ) schools enroll an additional 22 children, but there are no average increases in test scores or fees. We do not detect any impact on untreated ( _L_<sup>_u_</sup> ) private schools in this arm. In the _H_ arm, enrollment increases are smaller at 9 children per school. Unlike the _L_ arm however, test scores improve by 0.22 standard-deviation for children in these schools, accompanied by an increase in tuition fees by Rs.19 (8 percent of baseline fees). Revenue increases among _H_ schools therefore reflect both an increase in enrollment and in fees. Even so, revenue increases in the _H_ arm still fall short relative to that in _L_<sup>_t_</sup> schools: Although we cannot reject equal revenue increases in _L_<sup>_t_</sup> and _H_ schools, the point estimates for the former are consistently larger.

Our theoretical framework highlights why _L_<sup>_t_</sup> schools expand capacity while _H_ schools improve test scores (with smaller capacity expansion). We first extend the canonical model of Bertrand duopoly competition with capacity constraints due to Kreps and Scheinkman (1983) to allow for vertically di↵erentiated firms. Then, using the same rationing rule, whereby students are allocated to the schools that produce the highest value for them, we prove that expanding financial access to both firms in the same market is more likely to lead to quality improvements. Here, ‘more likely’ implies that the parameter space under which quality improvements occur as an equilibrium response is larger in the _H_ relative to _L_ arm.

> 3Despite better access to finance, parents may be unable to discern and pay for quality improvements; school owners themselves may not know what innovations increase quality; alternate uses of such funds may give higher returns; or bargaining within the family may limit how these funds can be used to improve schooling outcomes (de Mel et al., 2012). Alternatively, financial constraints may be exacerbated in the educational sector with fewer resources that can be used as collateral, social considerations that hinder collection and enforcement, and outcomes that are multi-dimensional and difficult to value for lenders.