Formerly Graduate School of Industrial Administration (GSIA)
William Larimer Mellon, Founder
Schenley Park
Pittsburgh, Pennsylvania 15213-3890
United States of America

Pierre Jinghong Liang
Associate Professor of Accounting

Information Asymmetry and Equilibrium Monitoring in Education

Maria Marta Ferreyra
Pierre Jinghong Liang
Carnegie Mellon University
 

Accepted and Forthcoming at Journal of Public Economics
May 2010
 
Downloading the paper
2008-Nov First Draft
2010-May Second Draft
2011-Feb Third Draft
Abstract
We develop a theoretical and computational model of equilibrium school choice and achievement that embeds information asymmetries in the production of education. School effort is unobservable to households and the policymaker, leading to moral hazard. Although household monitoring of schools can mitigate this problem, some households may free-ride on the monitoring of others. Moral hazard affects both public and private schools, yet public schools are subject to an additional distortion because their funding is fixed. Using our calibrated model we simulate two policies aimed at raising achievement: public monitoring of public schools and private school vouchers. In our simulations, public monitoring raises public school effort but can crowd out private monitoring, thus undermining its own effectiveness. Vouchers may not be able to help households in the low-income, low-ability segment because of these households’ high monitoring costs; furthermore, vouchers may hurt the public school by causing the loss of high-ability households who provide monitoring. These results indicate that in large-scale settings, no single tool may suffice, but a combination of them may succeed. Our results also indicate that setting the policy parameters for public schools at the appropriate level may mitigate the effort and funding distortions. This level is closer to that preferred by the majority of households than to that preferred by the public schools themselves. Moreover, the evidence suggests that the current values of these parameters are quite close to those preferred by the public schools rather than the households.
   
   
   
   

  English Version
Last updated September 1, 2011
send comments to liangj@andrew.cmu.edu 		Chinese Version
Last updated January 6, 2004
send comments to liangj@andrew.cmu.edu