metadata: authors: 0: author: Gauri, Varun
1: author: Vawda, Ayesha
count: Cote d'Ivoire,Chile,Colombia,Bangladesh,Czechia
docna: 0: docna: Vouchers for basic education in developing
            countries : a principal-agent perspective
docty: Policy Research Working Paper
subtopic: Taxation & Subsidies,Primary Education,Economics of Education,Educational Sciences,Educational Institutions & Facilities,Education Finance,Effective Schools and Teachers
teratopic: Gender
abstracts: cdata!: Voucher programs consist of three
            simultaneous reforms: (1) allowing parents to choose
            schools, (2) creating intense incentives for schools to
            increase enrollment, and (3) granting schools management
            autonomy to respond to demand. As a result, voucher
            advocates and critics tend to talk past each other. A
            principal-agent framework clarifies the argument for
            education vouchers. Central findings from the literature,
            including issues related to variance in the performance
            measure, risk aversion, the productivity of more effort,
            multiple tasks, and the value of monitoring are found
            relevant for an analysis of vouchers. An assessment of
            findings on voucher programs in industrial countries, as
            well as a review of voucher or quasi-voucher experiences in
            Bangladesh, Chile, Colombia, Cote d'Ivoire, and the
            Czech Republic support the usefulness of the analytic
            framework. The authors conclude that vouchers for basic
            education in developing countries can enhance outcomes when
            they are limited to modest numbers of poor students in urban
            settings, particularly in conjunction with existing private
            schools with surplus capacity. The success of more ambitious
            voucher programs depends on an institutional infrastructure
            challenging to industrial and developing countries alike.
geo_reg_key: 517208,119228,517198,517190,517212,517191
repnme: repnme: Vouchers for basic education in developing
            countries : a principal-agent perspective
display_title: Vouchers for basic education in
            developing countries : a principal-agent perspective
listing_relative_url: /research/2003/03/2191892/vouchers-basic-education-developing-countries-principal-agent-perspective
topicv3: Teachers Management m1326119 1523,Primary Education m1326139 480,Education m1327048 470,Private Education m1327271 1490,Vouchers m1504820 3553
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Gender
origu: Development Research Group (DECRG)
no_of_pages: 32
author_keys: 0: author_key: NA
1: author_key: NA
model_extractions: POLicy RESEARCH WORKING PAPER _3005_

# Abstract

Voucher programs consist of three simultaneous reforms: (1) allowing parents to choose schools, (2) creating intense incentives for schools to increase enrollment, and (3) granting schools management autonomy to respond to demand. As a result, voucher advocates and critics tend to talk past each other. A principal-agent framework clarifies the argument for education vouchers. Central findings from the literature, including issues related to variance in the performance measure, risk aversion, the productivity of more effort, multiple tasks, and the value of monitoring are found relevant for an analysis of vouchers. An assessment of findings on voucher programs in industrial countries, as well as a review of voucher or quasi-voucher experiences in Bangladesh, Chile, Colombia, C6te d'Ivoire, and the Czech Republic support the usefulness of the analytic framework. Gauri and Vawda conclude that vouchers for basic education **in** developing countries can enhance outcomes when they are limited to modest numbers of poor students in urban settings, particularly in conjunction with existing private schools with surplus capacity. The success of more ambitious voucher programs depends on an institutional infrastructure challenging to industrial and developing countries alike.

This paper-a joint product of Public Services, Development Research Group, and the Education Team, Human Development Network-is a background paper for the _2004 World Development Report._ Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Hedy Sladovich, room MC3-607, telephone 202-473-7698, fax 202-522-1154, email address hsladovich@worldbank.org. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at vgauri@worldbank.org or avawda@worldbank.org. March 2003. (23 pages) _The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the senes is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The ftndings, interpretations, and conclusions expressed in this paper are entirely those of the authors They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent._ Produced by the Research Advisory Staff
# **Vouchers for Basic Education in Developing Countries** A Principal-Agent Perspective

## **Varun Gauri**

Development Research Group World Bank, 1818 H Street, N.W. MSN MC3-3 11 Washington, DC 20433 vgauri@worldbank.org

## **Ayesha Vawda**

Human Development Network World Bank, 1818 H Street, N.W. MSN H 8-800 Washington, DC 20433 Avawda@worldbank.org The authors thank Shantayanan Devarajan, Harry Patrinos,<sup>DavidPlank,and Miguel</sup> Urquiola for useful comments on earlier drafts, and lmran Hafiz<sup>and HedySladovichfor</sup> help in preparing the manuscript.
# 1. **Introduction**

Educational systems in developing countries<sup>faceenormousproblems.In many of the</sup> poorest countries there are significant deficits in affordable<sup>accessand staggering</sup> differences in attainment between children from poorer<sup>and rich households. Even in</sup> many middle-income countries that have achieved<sup>near universal coveragein primary</sup> and secondary education, the quality of instruction<sup>and learningare low, particularlyfor</sup> poor people. Govermnent spending is often insufficient,<sup>and inefficientlyand inequitably</sup> allocated among educational inputs and across levels<sup>of education.And even where</sup> educational systems are adequately funded, the<sup>systemscan be indifferenttofamilies'</sup> concerns because they are dominated by an unresponsive<sup>state or by elites. In these</sup> settings, high rates of teacher absenteeism and low enrollment<sup>ratesfor girlsare</sup> symptomatic of systems in which incentives<sup>are inadequatelyaligned.</sup> What is the design of an educational system best able to address<sup>these problems?</sup> Speaking in the broadest terms, there are two archetypes<sup>for educationsystems.In the</sup> public archetype, the government finances education<sup>andmanages all aspectsof</sup> schooling, including the hiring of teachers<sup>and the construction of schools. The public</sup> archetype is useful for building a system where<sup>onehas not existed and for ensuring</sup> uniformity among schools, but it is typically<sup>less effective at motivatingteachers and</sup> schools to respond to families' concerns. In<sup>the privatearchetype, schoolsare privately</sup> owned and families pay the entire cost of tuition<sup>-this was the standard design of school</sup> systems in the 1 **9gh** century. The private archetype gives<sup>parentschoicesamongschools,</sup> and schools have a strong pecuniary motivation<sup>to keep their clientshappy.Butin the</sup> private archetype families unable to pay for school<sup>lose out.A number of analystsand</sup> reformers have argued that a combination of the<sup>public and privatearchetypes-public</sup> financing with private provision - is the best way<sup>to combine universal access with</sup> systemic responsiveness. The idea is give parents<sup>a voucher that can be redeemedat</sup> qualifying private schools, or to reimburse private<sup>schoolsbased on their enrollment</sup> rates.

In short, the use of vouchers for basic education in<sup>developing countriesis</sup> attractive for some of the same reasons that the<sup>idea has caught on in industrialized</sup> societies. It is thought that education is critical<sup>for individual and national welfare and</sup> increasingly so, that the quality of education is poorer<sup>than needbe, and,especially,that</sup> school system governance is the reason for this.<sup>The proposedremedy is to let parents</sup> choose the schools their children attend, finance<sup>schoolsbased on the number of students</sup> that choose them, and allow schools substantial<sup>managementautonomyto make</sup> themselves more attractive. This solution draws,<sup>obviously, on market principles.</sup> Despite the popularity of the proposal, there remains<sup>little empirical evidenceon</sup> the effects of voucher programs, and still less from<sup>developing countries.Programsthat</sup> 1
subsidize demand for education are not uncommon in developing countries, particularly those that aim to allay the direct and indirect costs of schooling for girls, low-income groups, and ethnic minorities.! Generally speaking, the objective of those programs is to increase the likelihood that children in particular groups enroll in and complete school. Voucher programs, on the other hand, generally aim to increase the quality of education among students who are already enrolled by expanding the range of choices parents enjoy. This review will focus on the latter.

This paper examines the available studies on the impact of voucher programs and, using a principal-agent framework, draws inferences about might be expected from voucher programs in developing countries, what kinds of voucher programs might be most useful, and what elements of the institutional infrastructure will be important for their implementation. The first section below examines the theoretical arguments for education vouchers from the perspective of the principal-agent problem. The second section compares the theoretical predictions to the evidence on the operation and impact of voucher plans in industrialized countries. The third section reviews five voucher and quasi-voucher experiments in developing and transition countries. Finally, the conclusion draws out inferences regarding the ways in which education vouchers might be useful in low- and middle-income countries.

# 2. Vouchenrs amd the iPrincipaR-Agent IProblenm

> In the public archetype a centralized education ministry designs a national

> curriculum, finances education out of general revenues, and pays capital and operating costs directly. It also makes all managerial and staffing decisions, negotiates teacher salaries directly with one or more national unions, remunerates and promotes teachers on the basis of negotiated, experience-related criteria, employs evaluations as indicators of need and not performance, and assigns students to schools. Critics of the archetypal

> system contend that its consequences are usually inordinate education sector employment, too many unmotivated teachers, unnecessarily high taxes, school administrators indifferent to families, and passive parents with no option but to enroll their children in schools with which they are dissatisfied.

> Instead, these critics advocate voucher systems, which depart from the archetype in three key aspects. First, students are not assigned to just one school but have choices

> among, depending on the details of the program's design, other public or private schools. The other common designation for voucher systems, systems of "school choice," draws its name from this facet. Second, schools have intense incentives to expand student enrollments. This follows from the fact that a significant part of school financing is

'Patrinos (2002) reviews the evidence on subsidies to demand in developing countries, including, for example, Bolsa Escola in Brazil, Progressa in Mexico, Food for Education in Bangladesh, and a community grants program in Pakistan.

2
channeled through a direct payment proportional to the number of students enrolled in (or in attendance at) a given school.<sup>2</sup> The idea is to shift the entity to whom schools are primarily accountable for their performance from the ministry, which is politically compromised in its efforts to enforce quality standards or even "captured" by the teachers unions, to parents and students themselves, who are the best judges of the education they want. In theory, these incentives will lead the better schools to take steps to improve quality, enhance efficiency, and develop innovative approaches to learning. Poorly performing schools will not attract students and will either close or be forced to find a market niche. Some of these schools might then satisfy demands that the bureaucratically constrained archetypal system cannot meet, such as schools that focus on computers, the arts, specific languages, certain ethnic traditions or religions, or learning methods for socially disadvantaged students. It is important to note that this criterion for voucher systems focuses not on the existence of subsidies to private schools, but on the degree to which, in practice, payments to schools vary with enrollment. In several European countries, for instance, political resolutions of religious struggles dating back to the seventeenth century entail notions of equal treatment of different denominations, and the state reimburses sectarian schools for some portion of their costs. Most of these are not really voucher systems, however, because the reimbursements are not proportional to enrollment, are proportional to enrollment but relatively small in magnitude, or are adjusted irregularly, with the result that schools do not have intense incentives to expand enrollments.<sup>3</sup> Third, voucher systems require schools to have enough managerial control to respond to parental demand. Substantial control over staffing and personnel decisions, budget, and instructional methods are critical for schools to be responsive to demand. At least limited control over capital expansion, calendar, and curriculum also facilitate flexibility on the part of schools. Voucher programs and proposals differ significantly on the extent of control granted to local schools, in these as well as in other areas, which lead to large variation in the expected outcomes. The extent and manner in which voucher schools can select students, or charge additional fees on top of the per student allocation, for example, is likely to result in substantial differences in the degree of socioeconomic sorting a voucher system will exhibit.

Because voucher programs actually consist of three simultaneous reforms, it is easy for advocates and critics of vouchers to speak past each other, addressing different 2 Formnally, incentives in a voucher system are modeled as r = a + P(e + x + yy), where r represents total payments to the school, a is a base payment for capital costs or in-kind inputs, e is school effort as measured by the number students enrolled, x is noise in the measurement of enrollments, y is a set of factors that varies with enrollment, and y a parameter that varies from 0 to 1. The higher the voucher value, , the more "intense" the incentives the school faces (Milgrom and Roberts 1992).

3 It is possible that schools will exhibit competitive behavior even in the absence of explicit, intense incentives. In some cases, rivalry for professional status can lead to a "culture of competition," as in the New Zealand system, described below.

3
aspects of the prograrn and drawing on different streams of research. Proponents, for example, draw on literature comparing efficiency in existing public and private schools (Cox and Jimenez 1991), arguing that more flexible management structures in the latter can explain their superior performance; but findings of that sort do not speak to the heart of voucher programs because it is theoretically possible, of course, to introduce school autonomy without subjecting schools to intense incentives. Similarly a critic of voucher programs might cite findings on the link between family or community involvement and student outcomes, and argue that voice, not exit, is critical for school performance; but that ignores the fact that voucher programs might enhance parental voice. Parents will first try to fix a school before exiting because student mobility, particularly at certain stages of leaming, can lower achievement and increase the likelihood of dropping out (Swanson and Schneider 1999). Another stream of research argues that choice enhances leaming by allowing parents to find schools in which there is a good match between their home cultures and school learning environments (Comer 1989); but that is not by itself an argument for voucher programs because it is achievable by allowing choice within the public sector. Even the seemingly diametrically opposed literature on the effects of topdown accountability and hierarchy in education can be relevant to the voucher debate (Ladd and Armacost 1996). That is because the quality of instruction in schools, on the basis of which parents choose schools, is not self-evident, and requires data on test scores, college admissions, and the like, which themselves are not obvious and need interpretation and explanation to take account of family contributions to learning, student selection effects, dropout, and other problems. So a voucher program is likely to require a good performance measurement system, one run by experts, to work well. But then, if a voucher school reorganizes itself and improves after its enrollments decline, it is reasonable to ask whether the school is doing that in response to declining enrollments or in response to having its outcomes publicized and its name "shamed" by the experts, which is what accountability in hierarchies consists of.

In addition, confusion arises because when parents' choices determine payments to schools, the benefits flow through two distinct channels. First, schools exert more effort to satisfy parents and attract more students. Second, parental expenditures and choices are more in line with their preferences. The former effect captures the benefits of competition that are at the heart of the voucher argument. The latter, though occasionally cited as a justification for voucher programs, depends largely on the details of the program design, and on assumptions regarding utility. If, for example, voucher programs do not allow parents to "top up" the value of the voucher, household expenditures on basic education are the same in a voucher program and an equally financed archetypal education system. How much utility parents derive from choosing a school depends on how informed their choices are, the time consistency of their preferences over the years their child is enrolled, and the extent to which constraints relating to the compulsory nature of basic education and supply-side homogeneity reduce the utility of choosing.

4
There might well be a related but<sup>distinct issue related to a parentalright to choosea</sup> religion for children (Wolfe 2003), but<sup>that moves beyond efficiencyargumentsfor</sup> voucher programs.

The supply-side effect - the idea<sup>that intenseincentives toexpand school</sup> enrollment motivate school effort<sup>-isthecentral componentof voucher programs.To</sup> understand this, it is useful to understand<sup>thestate asa "principal"which paysschools,its</sup> "agents," for providing educational<sup>services that further its objectives.Consistent with</sup> the voucher idea, agents are assumed to<sup>have sufficientmanagement autonomyto deliver</sup> the objectives. Clients are free to choose<sup>among the agents.The state rewardsschoolsin a</sup> linear compensation contract: payments<sup>are proportionalto the numberof students they</sup> enroll. As a result, the compensation<sup>schemeemploysintense incentives.Thestate's</sup> educational objectives are, stated loosely,<sup>the same formost governmentsin the</sup> contemporary world: to impart literacy,<sup>numeracy,a stock of culturalandscientific</sup> knowledge, and cognitive skills; to<sup>transmit social norms and worldviews;and to provide</sup> educational opportunities that structure<sup>life chancesbasedon localinterpretationsof</sup> freedom, equality, and non-discrimination.<sup>In a vouchersystem,thestate usually</sup> continues to rely on a national curriculum,<sup>thebroader institutionallandscape, and civil</sup> rights laws to guide schools toward<sup>those objectives;but it usesstudent enrollmentas the</sup> exclusive indicator of the effort a given<sup>school has exerted toachieve them.</sup> Another approach would model parents<sup>as principals, either alongsideor instead</sup> of the state as a principal, with the school remaining<sup>the agent.The difficultywith this</sup> approach is that parents, unlike the state, are<sup>not in a position to modify the termsof the</sup> contract. The state, to anticipate one of the<sup>findingsbelow,might for instancechooseto</sup> pay schools not only for each student<sup>enrolledbut an additionalamountfor students from</sup> minorities or from disadvantaged backgrounds,<sup>or less if aninflow of immigrantsraises</sup> average enrollment rates and lowers marginal<sup>costs for all schools in a neighborhood,or</sup> link payments to a weighted average of<sup>enrollmentsand testscores. Parentsare</sup> concerned only with the education of their<sup>own children,and will not pay more or lessif</sup> the school fails to fulfill a social objective.<sup>Schools,moreover,are not likely to accepta</sup> contract from a parent in which the parent<sup>doesnot pay if the school fails to achieveits</sup> educational objective because learning is jointly<sup>produced by students and the school.If</sup> education were provided individually, as in a<sup>tutor-pupilrelationship,parents mightwrite</sup> contracts with providers. But because schooling,<sup>for economiesof scaleand socialand</sup> historical reasons, is provided collectively,<sup>parents,if they were towritecontractswith</sup> schools, would also have to negotiate<sup>amongthemselveson the terms of the contract,</sup> resulting in a difficult collective action problem.<sup>For these reasons,it makes more sense</sup> to consider the state the principal in a<sup>system of intenseincentivescreatedin a voucher</sup> program.

_5_
> The principal-agent literature is now fairly advanced, and a set of findings is

> available from it that can be applied directly to the architecture of voucher programs in

> education (Milgrom and Roberts 1992). The remainder of this section reviews those findings and uses them to assesses what can be expected from voucher systems, particularly as they might function in developing countries. The theory of optimal payments includes the following findings regarding the payment formula.

_Bias and Noise in the Estimate of Effort_

> Theory indicates that compensation with intense incentives should be based only

> on performance measures that are strongly correlated with the agent's effort.<sup>4</sup> It is reasonable to ask, then, how well does enrollment estimate a school's effort at achieving the state's objectives? Parents probably do observe aspects of school effort that ministry

> officials might overlook, such as the attentiveness of staff, the dedication of teachers, and help in securing placement in higher-level schools. In developing countries, a simple

> indication of school effort that parents use is simply whether or not teachers show up for class. It _is prima facie_ plausible, then, to include enrollment in a formula for compensation based on intense incentives. But if parents' assessments of schools have systematic biases, then enrollments will be a biased estimator of school effort. A potential systematic bias on the part of parents is the tendency to conflate the composition of a school's student body, particularly along socioeconomic and racial dimensions, with the

> quality of the education offered, and the latter with the effort a school exerts.<sup>5</sup> Given that

> family background, not school performance, usually explains most of the variance in student performance, such a confusion on the part of parents would bias the state's

> indicator of school effort. That bias would also create a powerful incentive for schools to attract a student body that parents would find "desirable." If that is so, it will make sense

> to include in the compensation formula additional variables that correct for the effect of

> student body composition on demand for a school and on the learning outcomes for which the school is responsible.

> Moreover, enrollments can also be a noisy estimate of effort. Remoteness or transportation costs, changes in the birth rate, migration, the returns to education in the

> economy, and (arguably) cultural expectations about who should be in school are all

> exogenous determinants of enrollment that are uncorrelated with school effort.

> Compensation schemes that do not include factors like those weaken the intense

> incentives that schools face. Weights for these factors would not be hard to devise, and

4 The use of a poor measure of effort and the exclusion of observable, exogenous, correlates from the contract both raise the expected variance with which effort will be measured. The higher the variance, the higher the implicit costs of contracting. (Holmstrom 1979).

_5_ This "bias" on the part of parents is rational if enrolling one's child in a school with advantaged peers helps the child learn - if there are peer effects - or if enrolling in such a school is construed as a sign of high achievement by employers and higher level schools - if there are signaling effects.

6
they would not require frequent adjustment because the exogenous factors mentioned change slowly and are generally predictable.

With the respect to the objectives of schools beyond academic achievement, parents are also probably sensitive to whether or not school norms are consistent with the those of the larger society, and whether, at least within the school, principles of nondiscrimination are applied. Still, using parents' assessments alone might not be suitable when contested norms, such as gender equality, are emerging; and parents' assessments of particular schools and their consequent enrollment choices are by definition insensitive to equality of opportunity outside the school, in the education system as a whole. But because measures of those objectives are extremely difficult to construct, it makes more sense to use laws and professional norms to achieve them, and not try to incorporate them into the compensation scheme.

# _Risk Averse Agents_

According to theory, the less comfortable an agent is with risk, the higher the welfare cost it bears from intense incentives.<sup>6</sup> In voucher programs, schools that suffer enrollment declines receive lower revenues. That might result in lower compensation for teachers and staff if their salaries are tied to school performance, or if nationally determined pay scales for principals, say, are tied to the size of the school they administer. Staff in poorly performing schools might also suffer declines in their morale and reputations, which could make it harder to find other employment if they move or if their schools are forced to close. In developing countries, teachers can struggle to make ends meet, in some cases with household incomes below the national poverty line, and are less comfortable with risk than their counterparts in richer countries. As a result, voucher programs impose welfare costs on them and their families, and they might well decline to participate in, or resist, them. A related problem is the welfare impact when a voucher school is forced to close down: the transaction costs of transferring ownership of the facility, or the opportunity cost of letting it sit idle, carry higher welfare costs in countries where capital is in short supply. Of course, it is theoretically possible that improvements in student academic achievement following voucher programs might outweigh the negative welfare effect on teachers, owners, and taxpayers.

# _The Productivity of More Effort_

Intense incentives are worthwhile only if increments of additional effort produce better performance. This idea is implicit in voucher programs because the voucher idea assumes that school management and governance, through their effects on staff effort, are

> 6With a risk neutral principal and a risk averse agent, a Pareto optimal fee schedule is never one in which the agent bears all the risk (Shavell 1979), but a small degree of risk aversion in a linear compensation contract will a permit solution close to the first best (Holmstrom and Milgrom 1987).

7
the principal determinant of school performance. There are circumstances, however, in which schools, though motivated by intensive incentives, cannot substantially improve learning outcomes because of factors beyond their control. If, for example, the quality of teacher training is inadequate nationwide, textbooks are routinely stolen, it is difficult to recruit teachers to certain areas, teacher time is siphoned off by political parties for other purposes, or students are malnourished, then intense incentives for schools, though they might elicit greater effort at first, might not improve academic outcomes. If the desired outcome is not quality but merely school attendance, however, there is a stronger prima _facie_ case that schools paid to enroll students will expand educational access. Even here, however, exogenous factors, such as social expectations and population density, might dampen the effect of school effort. On the other hand, there might be circumstances in which the marginal effect of school effort is powerful, at least over a certain range of effort, as when modest numbers of public school students are given vouchers to attend private schools, which in many cases have the capacity to accommodate small numbers of new students into their existing schools and classes with just a little more effort. In that instance, an issue emerges about whether the design of the voucher scheme includes intense incentives for the public schools that those students have left, and what effects incremental effort on their part might have on school quality and on the willingness of the students to stay in them. In other words, it is important to distinguish a partial equilibrium effect (the incremental gain in learning for students who use vouchers) from the general equilibrium effect (which sums the effect for students who use vouchers and the effect on students left behind in public schools).<sup>7</sup>

# _Relative Compensation among Activities_

If a compensation scheme with intense incentives rewards certain activities at lower rates, the agent will not perform them. In the case of voucher programs, schools are not rewarded for stressing norms or principles of fairness with which many parents might disagree; so if the enforcement of rules governing, say, equal treatment or ethnic pluralism, are not well-enforced, the payment scheme will not give those schools a reason to pursue those objectives. Of course, the same can be true of compensation schemes without intense incentives, such as subjective evaluation; and it can be argued that since processes are difficult to observe, they should not be included in the compensation scheme.<sup>8</sup> A related phenomenon is that voucher programs might not stimulate innovation in instruction and curricula, as proponents hope, and might even dampen it, because

> 7 For a formal presentation of this point, see Hsieh and Urquiola (2002).

**8** Holmstrom and Milgrom (1987) argue that if two of an agent's activities can be separately observed, the weight to attach to each in the optimal compensation scheme depends not only on the costs and benefits of the activities but on their variances. The higher the variance, the lower the weight attached to the activity.

8
parents in many contexts<sup>are conservative about teachingmethods,and theformula for</sup> compensation does not pay<sup>schools forinnovationor professional development.</sup> Constraints external to the<sup>school,such asthe selection criteria of higher-levelschoolsor</sup> universities, might also limit<sup>theinterest schoolswill take in developingnew methods.</sup> Curricular innovation might<sup>wellbe moreeasily observed than overalleffort,so its</sup> inclusion in the compensation<sup>schememight makesense.</sup>

## _The Value of Monitoring_

With intense incentives,<sup>it pays to monitor theagent's performancecarefully</sup> (Milgrom and Roberts 1992).<sup>In a voucherprogram, a schoolwill be rewardedif it can</sup> exaggerate enrollment rates<sup>and get away with it. It willalso be rewardedif it</sup> successfully lowers standards<sup>for expellingstudents,or if it raises the averagegrades</sup> students can expect to receive,<sup>which in turn entices more of them to choose the school.</sup> Without reliable inspectors<sup>and a strong currentof professionalismamong educators,</sup> education ministries in developing<sup>countries will be hard pressedto monitor how schools</sup> behave in response to intense<sup>incentives,which in turn will lower the usefulnessof those</sup> incentives. If the costs of<sup>settingup a functioningmonitoring systemare sufficiently</sup> high, they will outweigh<sup>the benefitof imposing intense incentives, unless, of course, the</sup> establishment of a monitoring<sup>system itself enhancesprofessionalismand carries its own</sup> educational benefits.

# **3. Voucher Programs in Industrialized**<sup>**Countries**</sup>

While the expected effects<sup>of voucherprograms listedabovewere taken directly</sup> from theory, empirical work<sup>on voucher programsin industrializedcountries supports the</sup> usefulness of the framework.<sup>It should be emphasized,as the last sectionsuggested,that</sup> voucher programs take a variety<sup>of forms,dependingon,among other things, rules</sup> regarding student eligibility,<sup>student admissions, informationdissemination, fiscaland</sup> pedagogical accountability,<sup>the meanand the distributionof thevoucher value,and</sup> school-level management<sup>autonomy, which willall have an impacton the expected</sup> impact of any given program<sup>on academic achievement, equity, innovation,and the</sup> state's other educational<sup>objectives. Impact evaluationsof voucher programsremain</sup> sparse. Still, experiences<sup>with voucherprograms can be analyzed to determine whether or</sup> not they provide support<sup>for the principal-agentapproach.</sup> If enrollments are a biased<sup>or noisyindicator of schooleffort,then the expected</sup> impact of voucher programs<sup>on school effort is likelyto beweak,with little final impact</sup> on outcomes. In the United<sup>Statesstudies of the academiceffect of voucher programsin</sup> small, privately funded efforts<sup>in New YorkCity,Washington DC, Dayton,and</sup> 9
> Charlotte, and targeted, publicly financed programs in Milwaukee, Cleveland, and

> Florida, have found limited or mixed results, consistent with that expectation.<sup>9</sup>

In New York a private foundation offered scholarships of up to $1,400 to elementary school students enrolled in low-quality public schools. Some 20,000 students applied for the scholarships, and 1,300 were selected on the basis of a lottery. Using the lottery as an instrumental variable for private school attendance, Myers and others (2000) compared average reading and math test scores of students who enrolled in private schools with a comparable group of students who did not, and found no statistically significant difference; but a disaggregation of the results by race found evidence that students enrolled in the voucher schools did significantly better if they were AfricanAmerican, but not if they were Latino. Although in their study the advantage for AfricanAmerican students was driven almost entirely by the effects in grade 6, the finding was consistent with other studies finding some benefit for African-American students in Dayton, Charlotte, and Washington, D.C. (Howell and Peterson 2000a, Howell and others 2000b, Greene 2000). Despite the fact that available data for the evaluation of the publicly financed voucher program in Milwaukee involved only 341 students in seven non-sectarian schools, it has generated a great deal of controversy Witte (2000) found no consistent difference in achievement scores among voucher program participants and public school students, but Greene, Peterson and Du (1997, 1998) re-analyzed the data with a comparison group of voucher applicants who could not find space in a participating school and found that participating students did better after four years of enrollment. Rouse (1998) used the same data and found that voucher students did better in math but not in reading, and that the math advantage increased over time. Studies of the effects of these voucher programs on public schools and students who remain in the public system have been hard to conduct because the number of students involved has been so small. One study of Florida's voucher program (Greene 2001), in which students in schools deemed to have "failed" two years in a row are given the option of using vouchers in private schools, shows that every one of seventy-eight failing schools improved in order to avoid the voucher threat, and argues that this is evidence that voucher programs have positive effects for participants and non-participants alike. But is unclear whether the improvements in those schools can be attributed to vouchers per se or the social and political pressure following a failing grade.

More direct evidence on bias in the estimate of school effort comes from New Zealand. In the late 1980s and early 1990s, successive liberal and conservative

> 9For a summary of research findings on vouchers in the United States, as well as on charter schools,

> see Gill and others (2001). That volume argues that differences in academic achievement between

> conventional public and charter schools in Michigan, Texas, and Arizona suggest are relatively small and

> mixed in direction, though that might be a consequence of the relative youth of charter schools. Hoxby

> (2001) argues that areas with greater competition from charter schools exhibit higher achievement. Other

> reviews include Ladd (2002) and Neal (2002).

10
governments in New Zealand enacted a series of reforms whose result was a "quasivoucher" system in basic education (Wylie 1998). Control over the hiring of new teachers, operating budgets, the selection of academic missions, student fees, and local fundraising was transferred to self-governing school boards, which were composed of the principal, one teacher, and elected parents; and residency rules were loosened so that parents could choose any school. The system did not establish intense incentives based on enrollment, but schools started to compete for students anyway because they received more operating funds as enrollment increased, salary scales and prestige for principals were linked to school size, and schools gaining students were widely perceived to be "successful," which motivated school boards to expand enrollments.

Studies of parental choices in New Zealand found that schools serving largely disadvantaged groups saw their enrollments decline and their shares of minority students increase, and those serving advantaged populations were more likely to have their enrollments rise and their shares of minority students remain steady or fall, controlling for census-based predicted enrollments and, in secondary schools, certificate exam scores, which are not mandatory (Fiske and Ladd 2003, 2000). It appeared that white students were either fleeing schools with large minority populations or pursuing schools with advantaged students, and that minority students were fleeing schools with large minority populations. Additional research suggested minority students were less likely to consider a high status schools an option, and less likely to attend a nonlocal school (Smithfield Project 1995). While parents' decisions to flee schools with high minority populations might be individually rational, it is also consistent with the notion that in some contexts enrollment rates are biased estimates of school quality. There was also evidence of noise in the correlation between enrollment and quality: when one secondary school suffered a number of suicides, enrollment declined dramatically even though it was far from clear that the school atmosphere was causally associated with them (Fiske and Ladd 2000). In New Zealand, schools also used a variety of clever but legal techniques to recruit more advantaged populations: in 1997 the percentage of schools using these "enrollment schemes" was over 50 percent in Auckland and Christchurch, and 24 percent in Wellington (Fiske and Ladd 2000). The apparent increase in socioeconomic polarization in New Zealand was probably also related to the fact that schools were able to set their levels of student fees, as well as the fact less advantaged parents had a harder time accessing information about and traveling to the better schools.

Though systematic studies are not available, similar accounts have appeared regarding the voucher program in Sweden. From the early 1 990s onward, Sweden transferred control and management of schools to municipalities, which began to finance education based on, in approximately equal portions, their own revenues and block transfers from the central government. Municipalities now grant privately managed "independent" schools, some of which had been receiving state assistance, per-pupil 11
subsidies equal to the per-pupil financing granted<sup>to publicschools.The enrollmentshare</sup> of independent schools increased from 1 percent in<sup>1991to 4 percentin 2002. Parents</sup> with children in independent schools appear to be better<sup>educatedthan those in public</sup> schools, and they seem to be making their choices to avoid<sup>schools with large sharesof</sup> non-Nordic immigrants (Daun 2003). A study in<sup>one largemunicipality foundthat some</sup> schools with large declines in enrollment were unable<sup>to attractbetter teachers,but that</sup> others were able to establish new market profiles (Daun<sup>2003).</sup> Evidence on systematic bias in the estimate of<sup>effort ismixed in England, and</sup> evidence on the outcomes of the voucher program is unclear.<sup>A seriesof laws beginning</sup> in 1980 created a quasi-market in government-financed<sup>basic education England</sup> (LeGrand 1991, Walford 1997, Walford 2003).<sup>The1988EducationReform Act</sup> transferred control of budgets and personnel hiring<sup>to state-maintained schools,linked</sup> school funding to age-weighted enrollment figures, allowed<sup>parents to attend anyschool</sup> with available spaces, and required schools to follow the<sup>National Curriculum.In 1993</sup> schools were allowed to select 10 percent of their<sup>students on the basis of musicalor</sup> other abilities, and other legislation that same year<sup>permitted existing privateschoolsor</sup> independent sponsors to establish grant-maintained<sup>schools.Seven new schools were</sup> formed from 1993-1997, and seven more have<sup>been established under the Labor</sup> Government, which has retained the voucher-like<sup>systemin English education.</sup> A series of case studies has argued that the choice system<sup>has led to increased</sup> social segregation among schools, as students<sup>sorted based partly on the social mix in</sup> schools and as schools started to select students<sup>(Ball and Vincent1998,Gewirtz,Ball,</sup> and Bowe 1995), but statistical analyses of class<sup>segregationhave been inconclusive</sup> (Gorard and Fitz 2000, Gibson and Asthana 2000,<sup>Levacicand Woods1999), partly</sup> because the previous system in which students<sup>were assignedto schools basedon</sup> residence, "selection by mortgage," had already<sup>created substantial sorting. Achievement</sup> scores of students in the system increased during<sup>the1990s,and somestudiesargue that</sup> competition among schools, as measured by private<sup>sectorenrollmentshare, number of</sup> schools, or a Herfindahl index, is associated<sup>with higher test scores.(Bradleyand Taylor</sup> 2002, Millington and Bradley 1998), but other<sup>studiesfind mixed results.One, in</sup> particular, used interviews with headmasters to try to<sup>establisha link betweenstructural</sup> competition in a market, measured by the number<sup>of firms or a Herfindahlindex,and</sup> competitive behavior, and found that the relationship<sup>is looser than believed,being</sup> mitigated by amount of space available, product<sup>differentiation(type of education</sup> offered), and other factors. It also found that<sup>theimpact of competitionin performanceis</sup> sensitive to the measure of competition used (Levacic<sup>2001).Alongside the voucher</sup> system, the Conservative government in the early<sup>1990s introducednationwidetesting,</sup> required publication of test results, and school<sup>inspections -a system of "namingand</sup> 12
shaming." It is possible<sup>that theaccountabilitysystem, ratherthan competitionfor</sup> students, motivated school effort.

Some European countries<sup>with vouchersystems,recognizingtheincentive that</sup> flat per-pupil payments create<sup>for schools toselect relatively advantagedstudents and for</sup> parents to choose those "successful"<sup>schools,transferadditional resourcestoschools</sup> based on the composition of<sup>thestudent bodyenrolled.Hollandpays1.9time the</sup> standard voucher value<sup>for each minoritystudent and1.25 timesthat value for an</sup> economically disadvantaged<sup>student(Patrinos2002b).Swedenalso transfersadditional</sup> resources based on numbers<sup>of minoritystudents and studentswith learningdisabilities.</sup> With regard to the other predictions<sup>of the principal-agentliterature,</sup> constellations of teachers,<sup>local politicians,and votershavesuccessfullyresisted efforts</sup> to close schools, even those<sup>withlow enrollmentsanddecliningquality,in almostall</sup> countries. That is suggestive<sup>of the risk aversion (and thepolitical power)of the actorsin</sup> the education sector, including<sup>teachers.The experiencesinthe industrialized countries</sup> also suggest that voucher programs<sup>can resultin less attentiontonon-compensatedschool</sup> activities, such as curricular<sup>innovation. Case studies have found, consistentwith the</sup> predictions of the principal-agent<sup>literature,thatpedagogyin EnglandandWaleshave</sup> become more uniform<sup>asschoolshavebecome ranked on thesamehierarchical academic</sup> scale. Schools seemingly<sup>havespentless effort on pedagogical innovation because they</sup> were not rewarded for it,<sup>perhapsevenpunishedsinceparentshavetended to be</sup> conservative.<sup>(Walford2003)Fiskeand Ladd (2000) also reportedthat</sup> pedagogically some teachers felt that collegiality<sup>declinedin New Zealandover the period,and that</sup> parents, regardless of socioeconomic<sup>status, rated the qualityof schoolssimilarly, which</sup> resulted in a consistent focus<sup>on traditional academicsin mostschools andlittle curricular</sup> innovation. Both findings<sup>areconsistent with the notion that whencertain activities,in</sup> this case professional relations<sup>among teachers and pedagogicalinnovation,are rewarded</sup> at lower rates, they will receive<sup>less attention.In the United States,voucher students were</sup> less likely to have disabilities<sup>than the publicschoolpopulation(Myersand others 2000),</sup> probably because voucher<sup>schools werenotcompensatedfor taking on those kindsof</sup> students. Evidence on the<sup>tworemaining theoretical findings,the productivityof more</sup> effort and the value of monitoring,<sup>werenot available from the industrializedcountries.</sup>

# _Voucher Programs in Developing_<sup>_and Transition Countries_</sup>

Although there have been experiments<sup>with demand-sidefinancingin a large</sup> number of developing and<sup>transitioncountries (Patrinos2002a),true voucher programs</sup> are rarer. The reforms in Chile<sup>and Colombia,described below,are probablythe only</sup> genuine examples. Still, this<sup>review includes "quasi-voucher"initiativesinC6ted'Ivorie,</sup> the Czech Republic, and<sup>Bangladesh,to illustrate the variety of contexts in which</sup> voucher programs might<sup>be implemented, and the results theymight achieve.</sup> 13
_Chile._ Starting in 1980, Chile transferred management of primary and secondary schools to municipalities, abolished pay scales and civil servant protections for teachers, started to finance municipal and non-fee-charging private schools at equal rates tied strictly to attendance, and encouraged parents, whose enrollment choices were not restricted to residential zones, to choose schools based on performance. The democratic government that assumed power in 1989 re-established salary scales and employment protection for teachers, but in other respects it maintained Chile's voucher system. It remains probably the closest national-level approximation of a voucher system among developing countries (Gauri 1998).

The Chilean voucher system led to a dramatic increase in students enrolled in private voucher schools, whose enrollment share increased from 15 percent in at the beginning of the 1980s to 33 percent in 1996, almost entirely at the expense of the municipal schools' share. Although teachers did shift to the private subsidized sector, almost no municipal schools were closed. There is evidence that the private subsidized schools in Chile perform better, based on test scores, than municipal schools (Aedo and Larrafiaga 1994, Rodriguez 1988), but this private advantage disappears or turns negative when student-level socio-economic data are included as controls (Mizala and Romaguera 1998, McEwan 2001). McEwan and Carnoy (2000) find that Catholic schools perform better than municipal and non-religious private voucher schools, but that they spend more per student than the other groups of schools. A study that attempted to measure the effects of private school competition on municipal schools found that communities with higher concentrations of private school enrollment had modestly higher positive test scores in the national capital (a net 0.2 standard deviation gain over fifteen years), but small negative effects in the rest of the country (McEwan and Camoy 1999). Another study found that communities with higher private enrollment shares saw public school performance fall from 1982-1988 (though the point estimate was significant only at the 10 percent level), and concludes that even if a voucher system creates incentive effects that lead to improvements in municipal schools, the fact that the better students migrate from municipal to private schools could lead to an overall decline in municipal school performance (Hsieh and Urquiola 2002). That same study argues that although small numbers of public students might benefit from vouchers to attend public schools, when a voucher system induces large number of students to move to private voucher schools the overall impact can only be assessed by taking the sum of the (assumedly positive) effect for the migrating students, the (assumedly positive) effect of competition on public schools, and (assumedly negative) effect of the loss to public school students of their most talented peers. It concludes that national aggregate indicators of achievement, including Chile's ranking in international test scores and the achievement gap between subsidized and non-subsidized elite schools, did not change. There is also evidence that schools in all sectors in Chile took active measures to select more advantaged students during this period (Gauri 1998, Espinola 1995).

14
The Chilean experience with vouchers,<sup>consistent with the theoretical predictions,</sup> suggests that when enrollments are the<sup>estimatefor school effort,schools take steps to</sup> make themselves more attractive to parents<sup>by enrollinga more advantagedclientele.</sup> Whereas the New Zealand experience<sup>showed that sorting effectsof thissort can be</sup> problematic when the supply of schools<sup>isfixed, the experiencein Chileillustratesthat</sup> sorting can also occur when there is a<sup>strong supply response.In Chile, the effectsof</sup> intense incentives based on enrollment<sup>weremodest in the national capital,and zero or</sup> negative elsewhere. That is also consistent<sup>with theexpectation that when school effort is</sup> not directly related to productivity,<sup>intenseincentivesdo not lead to increasesin</sup> performance. The fact that no municipal<sup>schoolswereclosed is consistentwith the fact</sup> that intense incentives can carry costs for<sup>risk averseagents,who will fight effortsto</sup> relocate or close schools. Finally, Chile's<sup>voucherformula includedadjustmentsfor rural</sup> schools, in recognition of the need to include<sup>covariatesof enrollmentin intense</sup> incentives.

_Colombia._ Starting in 1992, a program<sup>in Colombia offered vouchers toentering</sup> sixth grade students residing in low-income<sup>neighborhoodsand who had previously</sup> attended a public school. The vouchers<sup>wererenewable through the end of secondary</sup> school, co-financed by the central government<sup>and participatingmunicipalities,and</sup> assigned by lottery where local demand<sup>exceeded the municipal allotment.The voucher</sup> program was designed to help poor students<sup>make the transition tosecondary schoolin</sup> areas where public schools were filled<sup>tocapacity.Financing to public schools was not</sup> reduced when they lost students to the<sup>program.The valueof thevoucher was initially</sup> high enough to pay for tuition at low-cost<sup>private schools,butit was not indexed to</sup> inflation, and as a result by 1998 participating<sup>studentswere typicallymakingout-of-</sup> pocket payments equal to the voucher value<sup>to cover tuition costs.Most elite private</sup> schools in Colombia elected not to accept<sup>thevouchers.The programprovided125,000</sup> students, amounting to about 1 percent<sup>of national secondary enrollment,with vouchers</sup> before it was discontinued in 1997<sup>(Angristand others2001,King and others1997, King,</sup> Orazem, and Wolgemuth 1999, Calder6n<sup>1996, Montenegro1995).</sup> A quasi-experimental study compared<sup>educationaland other outcomesamong a</sup> sample of students who won and lost<sup>the voucherlottery (Angristand others 2001).</sup> Lottery winners had lower grade repetition<sup>rates than losers but werenot more likely to</sup> be enrolled in school. A sample of lottery<sup>winnersalso scored 0.2 standard deviations</sup> higher on standardized tests, controlling<sup>for age,gender,parents'schooling, and strata of</sup> residence, and almost 0.3 standard<sup>deviations higher in a two-stageleast squares</sup> regression that took into account private<sup>school scholarshipsotherwiseobtained by</sup> lottery losers and scholarship non-use<sup>by winners.Theeffects for girls were slightly</sup> larger, and were estimated more precisely,<sup>than for boys.Winnersspent $52 more on</sup> school fees than lottery losers, gave up<sup>$41in reducedearningssince they remainedin</sup> 15
school longer, and received scholarships that were $74 higher, for a net household contribution of $19. The public spent an extra $24 for each voucher student, net of reduced public school costs.

> An analysis of the overall impact of the program in Colombia would take into account the effect on the public schools of losing motivated students, as well as the effect

> on participating private schools of taking new students. Short of research of that scope, however, the study cited above at least makes plausible the argument that in certain circumstances the marginal impact of incremental private school effort can be substantial. That is consistent with the theoretical findings above, though it should be noted that programs like Colombia's do not create intense incentives for schools, but instead exploit those incentives in existing private schools. The Colombia program is also consistent with the predictions that the marginal impact of school effort will be lower in rural settings, since most participating schools were in the large urban areas, and that schools behave as if families use the socio-economic composition of their student body as an

> indicator of quality, since most elite schools in Colombia refused to accept the vouchers.

_C6te d'Ivoire._ Cote d'Ivoire subsidizes private primary schools at rates that are negotiated with umbrella groups for Catholic, Protestant, and secular schools, that vary with school location and tuition charges, but that are loosely tied to the total number of students enrolled, and that ranged from $US40-$66 in 1999. At the secondary school level, reimbursements to private schools resembled a voucher system even more closely: in 1999 the government reimbursed private secondary schools US$200-$233 per year for each "state-sponsored" student. These voucher values were above market tuition at some private schools, but about one-tenth the fees at the top ones. The process through which students qualified for sponsorship was not transparent, but it was tied to test scores, which had been the subject of corruption controversies in past years. Generally, private schools had small permanent teaching staffs and hired public sector teachers on a contractual basis or "rental" teachers from the government. Private enrollments were 13 percent of the national total at the primary level and 36 percent at the general secondary level. Some 42 percent of private students at the primary and secondary levels received either direct or indirect state support. The per capita private education subsidy was significantly higher for families in the top quintile than families in the lower quintile, but the same was true for public education, which favored urban areas.

Outcomes studies in Cote d'Ivoire were not available. One analysis compared results of a standardized test administered to five Francophone sub-Saharan countries (Michaelowa 2001). It noted that although primary education expenditure as a share of GDP in C6te d'Ivoire was 50 percent more than Cameroon and three times that of Madagascar, and its per capita GDP higher than both countries, test scores among fifth graders in Cote d'Ivoire were lower. Enrollment rates in Cote d'Ivoire were 54 percent, lower than Cameroon but above Madagascar. For girls in some regions of Cote d'Ivoire, 16
first grade enrollment rates were<sup>as low as 12 percent.Explanationsfor inefficiencyin</sup> expenditures included the fact that<sup>theteaching year in Cote d'Ivoirewas one of the</sup> shortest in the world, at 820<sup>hours, that studentsin doubleshift classesspent evenless</sup> time in school, that charges and<sup>other obstacles toaccess resultedin pupil/textbookratios</sup> of 5/1 in urban areas and 10/1<sup>in rural areas,that teachersalarieswere high (an average of</sup> nine times GNP per capita), and<sup>that classsizeswere thelowest among the five</sup> comparator nations (LaRocque<sup>1999,WorldBank 1998).</sup> Although detailed analyses of the<sup>voucher program in Cote d'Ivoirewere not</sup> available, the case illustrates that<sup>even if schools aregiven intense incentives,external</sup> constraints on performance, such<sup>as the labormarketfor teachers,nationalrules</sup> regarding the school year, and<sup>expectations regarding girls'education,can mitigate the</sup> returns to school effort. In those<sup>circumstances, compensationbased on enrollment will</sup> be weakly productive for raising<sup>achievement.</sup> _Czech Republic._ Private schools<sup>were legalized in the Czech Republic in 1990.At</sup> the same time, state-run schools<sup>were givenlegal status and authority over enrollment</sup> and curricula. Although private<sup>schoolsat first received"equal treatment" with respect to</sup> public financing, in 1995 their<sup>public fundingwas lowered to60-90 percentof that going</sup> to state schools. Following complaints<sup>about the arbitrarinessof the state'sfunding</sup> decisions, a new formula in 1999<sup>directed privateschools to receivefunding basedon a</sup> set of defined quality measures.<sup>In that scheme,state-runschoolsreceivedseparate</sup> investment and recurrent budget<sup>allocations,the latter being determinedon a per-pupil,</sup> voucher-like basis. The recurrent<sup>componentwas itself divided into two parts:a base</sup> support level varying on the type<sup>of school(on average50 percentof the per-pupil</sup> payment to state schools), and a<sup>componentbased on quality, with a maximum total set at</sup> 90 percent of the state sector per-pupil<sup>subsidy. The averageprivate school received just</sup> under 80 percent of the per student<sup>allocationthat public schoolsreceived.Private</sup> secondary schools could charge<sup>tuition, which in1998averaged 55-65percentof the per</sup> student allocation going to public<sup>secondaryschools.Although theenrollmentshareof</sup> private primary schools remained<sup>tiny, the secondary schoolshare went from 0.1percent</sup> in 1990 to 9.8 percent in 1999 (Filer<sup>and Munich 2003,World Bank 2001).</sup> Assessments of the voucher-like<sup>systemof educationfinancing in theCzech</sup> Republic remain provisional. One<sup>study found that parents with higherearningsand more</sup> education were more likely to choose<sup>a privateschool,but that many privateschools</sup> found their market niche by enrolling<sup>students whodid not gain admission in the most</sup> desirable, oversubscribed public<sup>secondary schools.There is littlepublished data on the</sup> criteria private schools used to select<sup>students,and whetheror not enrollmentsare</sup> functioning as a useful estimate of<sup>schooleffort.Provisionalevidencesuggeststhat areas</sup> with relatively weak public schools<sup>weremore likelyto haveprivate schoolsestablished</sup> (Filer and Munich 2000).

17
_Bangladesh._ Non-government, not-for-profit schools enrolled 80-95 percent of secondary school students in Bangladesh in 2001, depending on how religious schools (madrassas) were classified. The government subsidized 80 percent of the base teacher salaries at these non-government schools, subsidies which in 1997 accounted for 79 percent of total government expenditures at the secondary level. Because these schools were supposedly required to follow state criteria regarding the number of students and recruitment of students, the subsidies functioned as a sort of voucher: when schools attracted enough students to warrant the hiring of another teacher, the government subsidized that increase in enrollments by paying for most of the teacher's salary. Private secondary schools were permitted to charge student fees, and these charges for admission, tuition, books, uniforms, stationery, sports, after-hours tutoring, and other activities constituted, on average, half to two-thirds of private school revenues. Demand for secondary education was strong enough, and entry requirements in the sector liberal enough, that overall enrollments doubled from 1990 to 1997, when they reached seven million students.

But the norms for the transfer of the subsidies were weakly enforced: one survey found that in 1998 only 29 percent of principals reported a visit by an inspector in the recent past. As a result, schools applied for and received subsidies without complying with enrollment-related and other norms, and the quasi-voucher system did not necessarily create intense incentives to expand school enrollments. The private fees, however, did serve that function. By all accounts, however, the quality of secondary education in Bangladesh was inadequate despite per pupil expenditures that by international standards are relatively high. The private schools did not train their teachers or develop new teaching methods, instead relying on the traditional pedagogy of memorization. The principal purpose of secondary education in the country was to screen and winnow university applicants on the basis of the all-important examinations: fifteen percent of students that enrolled in the first year of secondary completed a secondary degree, and six percent went on to a university, with promotion rates as low as 75 percent between successive academic grades. Textbooks were often unavailable, and charges of cheating, both on the part of students and schools, were not uncommon. The Bangladeshi experience with a quasi-voucher system is consistent with several theoretical predictions: intense incentives can fail to achieve objectives without a functioning monitoring system, school effort will not be related to academic outcomes if exogenous factors, such as textbook shortages and examination pressures, limit returns to effort, risk averse actors will lobby to reduce the risk to which voucher programs expose schools, and certain pedagogical activities, such as curricular innovation and teacher training, will not occur in the presence of intense incentives on enrollment and external pressures, such as exams (World Bank 2000).

18
# **4. Conclusion**

Voucher programs are a potential solution to the problem that governments face when motivating schools, their agents, to put forth effort. The compensation scheme, making school payments proportional to enrollments, creates intense incentives to satisfy parents. Enrollment is a useful measure of school effort. But because parents frequently conflate student body composition with learning opportunities, voucher programs can create a strong incentive for schools to select advantaged students. Findings in Chile and New Zealand are consistent with this concern. Where administratively feasible, it makes sense to set the voucher value for disadvantaged students at higher levels, as Holland does. Where it is not feasible, which is likely in most developing countries, eligibility for voucher programs might be restricted to the poor. Second, intense incentives are worthwhile only if more school effort produces better results. For small voucher programs that send modest numbers of students to urban private schools with surplus capacity, as in Colombia's experiment, that might well be true, and returns to program investments might be high. In programs with wide eligibility, the ability of schools to improve learning among large numbers of students is likely to be limited in many developing countries by factors beyond the schools' control, such as the number of qualified teachers, the availability of textbooks, and pedagogical traditions. Third, principal-agent theory holds that when the principal rewards certain activities at lower rates, those activities will receive little or no attention. Voucher programs, which do not reward innovation, are unlikely to promote diversity and innovation in teaching if parents are pedagogically conservative. Voucher programs in Chile, New Zealand, England and Wales, Bangladesh, and CMte d'Ivoire did not promote pedagogical innovation; in fact, case studies suggest that pedagogy might have become more uniform in those countries. In voucher programs, governments will need to continue to finance and support teacher training and professional development in private schools. Fourth, the principal-agent literature indicates that intense incentives carry a welfare cost for risk averse agents, such as teachers, school owners, and poor parents in developing countries. As a result, outright voucher programs, in which teachers are laid off and schools are closed, are more costly in those contexts. Finally, a voucher program reward schools that can get away with exaggerating enrollment rates or loosening educational standards; so the effect of intense incentives to expand enrollments will be distorted unless a government is able to establish a functioning monitoring system, which can be expensive for some countries.

In developing countries, vouchers for basic education can be useful in small doses. Programs involving limited numbers of poor students in urban settings, particularly in conjunction with existing private schools with surplus capacity, can have dramatic effects on the achievement of participating students. But programs with wider eligibility entail an institutional infrastructure challenging to industrialized and developing countries alike. Creating a system to monitor enrollment rates and processes 19
within schools, devising a system to mitigate pressures for schools to select advantaged students, working with risk averse teaching staffs, and promoting professionalism in private schools are all necessary to make ambitious voucher programs effective. As experiences in those developing countries that have voucher or quasi-voucher programs suggest, that is easier said than done.

# Rleferenees

- The word "processed" describes informally reproduced works that may not be commonly available through library systems.

- Aedo, C., and 0. Larrafiaga. 1994. "Sistemas de Entrega de los Servicios Sociales: La Experiencia Chilena." In C. Aedo and 0. Larrafiaga, eds., _Sistema de Entrega de los Servicios Sociales: Una Agenda Para la Reforma_ (pp. 33-74). Washington, D.C.: Banco Interamericano de Desarrollo.

- Angrist, J.D., E. Bettinger, E. Bloom, E. King, and M. Kremer. 2001. "Vouchers for Private Schooling in Colombia: Evidence from a Randomized Natural Experiment." Working Paper 8343. National Bureau of Economic Research, Cambridge, Mass.

- Ball, S., and C. Vincent. 1998. "'I Heard it on the Grapevine': 'Hot' Knowledge and School Choice." _British Journal of Sociology of Education_ 19(3): 377-400.

- Bradley, S., and J. Taylor. 2002. "The Effect of the Quasi-Market on the Efficiency-Equity Trade-off in the Secondary School Sector." _Bulletin of Economic Research_ 54(3): 295314.

- Calder6n, A. 1996. "Voucher Programs for Secondary Schools: The Colombian Experience." Report 16232. Human Capital Development Working Paper. Washington, DC: World Bank.

- Comer, J. 1989. _A Conversation between James Comer and Ronald Edmonds: Fundamentals of Effective School Improvement._ Dubuque, IA: Kendall/Hunt.

- Carnoy, M., and McEwan, P. 2002. "Does Privatization Improve Education? The Case of Chile's National Voucher Plan." In D. Plank and G. Sykes, G., eds. _Choosing Choice: School Choice Policies in International Perspective._ New York: Teachers' College Press (in press).

- Camoy, M. 1998. "National Voucher Plans in Chile and Sweden: Did Privatization Reforms Make for Better Education?" _Comparative Education Review_ 42(3):309-337.

- Cox, D., and E. Jimenez. 1991. "The Relative Effectiveness of Private and Public Schools: Evidence from Two Developing Countries." _Journal of Development Economics_ (34):99121.

- Daun, H. 2003. "Markets Forces and Decentralization in Sweden: Impetus for School Development or Threat to Comprehensiveness and Equity?" In D. Plank and G. Sykes, G., eds. _Choosing Choice: School Choice Policies in International Perspective._ New York: Teachers' College Press (in press).

- Espinola, V. 1995. "The Decentralization of the Educational System in Chile." CIDE Working Paper.

- Filer, R., and D. Munich. 2003. "Public Support for Private Schools in Post-Communist Central Europe: Czech and Hungarian Experiences." In D. Plank and G. Sykes, G., eds. _Choosing_

20
_Choice: School Choice Policies in International Perspective._ New York: Teachers' College Press (in press).

- Fiske, E., and H. Ladd. 2003. "School Choice in New Zealand: A Cautionary Tale." In D. Plank and G. Sykes, G., eds. _Choosing Choice: School Choice Policies in International Perspective._ New York: Teachers' College Press (in press).

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Internal Documt **'ILS** Ui MC C3-301 _3_ **COplI(**