Claudia Allende from University of Chicago will present "Competition Under Social Interactions and the Design of Education Policies".

Abstract:

This paper studies families’ preferences for peers in the school and the implications of those
preferences for the distribution of academic outcomes. I develop an equilibrium model of
school competition and student sorting under social interactions. In the model, families differ
by human capital and income. Academic achievement depends on own characteristics, school
productivity, and the characteristics of the peers. Geographic differentiation gives schools local
market power to increase prices and decrease quality in the absence of close substitutes. On
top of that, social interactions generate interdependencies in demand that add a new dimension
for school differentiation. This modifies school incentives through two channels: increased
differentiation strengthens market power for some schools (direct channel) and incentivizes a
screening strategy that exploits heterogeneous responses to prices and quality to intensify that
differentiation (strategic channel). To study the empirical importance of these mechanisms, I
estimate the model using administrative microdata from Peru. I address endogeneity of prices,
quality, and peers by combining a regression discontinuity in the assignment of a scholarship
with instruments that exploit the timing and local variation of a generous teacher payment
reform and shocks to student sorting generated by a teachers’ strike. I find that social interactions
have sizable effects, increasing the income gap in academic achievement by 30 percentage
points. I use the predictions of the model to analyze the effects of counterfactual education policies
in equilibrium. I then decompose the mechanisms to provide guidance on how to design
education policies that improve the distribution of outcomes.