The Effects of Competition on Educational Outcomes

Updated on Jul 26, 2007

Competition exists when multiple providers of a service, who all must adhere to the same legal rules and regulations, are available to meet the demands of consumers. In economic theory, when there is more competition among providers, prices consumers pay for services are lower. In addition, suppliers must accept lower profits, resulting in the survival of only the most efficient ones. In the education sector, where "consumers" are parents/children and "suppliers" are schools/districts, theoretically, more competition should translate into higher quality schooling and enhanced educational outcomes. 

This Digest reviews the sizeable body of literature that examines the relationship between competition and quality. It looks at various measures of competition, and considers a range of outcomes that might be enhanced. It also evaluates the reliability and validity of this evidence. Finally, the Digest makes some policy recommendations. 

The research reviewed here examines competition among U.S. schools and school districts. The research spans thirty years, from 1972 to 2002, and includes only studies with an explicit measure of competition. Essentially, the review focuses on the link between educational outcomes and competitive pressures across geographical areas, and it uses large-scale cross-sectional datasets. This yields 41 distinct empirical papers, employing over 400 individual tests. 

What Does "Competition" in the Education Sector Mean?

An education market exists whenever parents have a "choice set" of providers. In the U.S., parents may choose (1) between public and private schools, (2) among public school districts, and (3) among public schools within a given district (Teske and Schneider 2001). 

Generally, when there are more choices, there is more competition. Therefore, by counting the range of choices across the domains, it is possible to gauge the extent of competitive pressures. However, the process is not this straight- forward because not all choices are available, or equally salient, to all parents. Non-Catholic families may not see Catholic schools as an option. Private schools charge fees. Many small, rural districts consist of only one school, so choosing another school may mean relocating Also, some families may have ample choice in one domain (many public schools to pick from) but not in another (no private schools nearby). 

Finally, the presence of many choices does not necessarily ensure greater competition. Local schools may be so similar that it does not matter which site is selected, or schools may agree not to compete. 

Conventionally, competition is measured by the Herfindahl Index, which is the sum of the squares of per-unit enrollments over total enrollments, where the units are typically schools within a district (Borland and Howson 1993). If there are several schools in a district, the Index value is close to 0; as the number of schools drops, the Index moves closer to: 

So, the higher the Index value, the less competitive the market. 

A second measure of competition used in the literature is the percentage of students in private schools. When there are more private-school spaces available, parents can more easily remove their children from public school. To prevent or stop an exodus of students, these public schools are under greater pressure to offer high-quality education. 

Greater competition may have varied effects. It may enhance students' motivation, effort, and interest if it allows them to enroll at a school that better suits their preferences. It may improve a school's productivity, leading to better teacher selection. Overall, education systems should be more efficient, likely leading to more positive outcomes. But competition's effect on costs/expenditures is ambiguous, because if families value high-quality education, they may demand more of it, which in turn raises expenditures. 

The impact of competition is evaluated using test scores and other educational outcomes. To assess these impacts, a simple test is applied to each piece of evidence: What would be the predicted effect on educational outcomes if competition were increased by one standard deviation? One standard deviation represents a fairly big increase in competition (about 10 percent of students per county attend private school; an increase of one standard deviation would raise that to around 15 percent). The test nevertheless allows for a consistent evaluation of competitive pressures. 

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