10° 40' N, 61° 30' W

Friday, October 31, 2003


Burning the candle at both ends, I'm afraid. Among other things I've had the flu for the past week, which is not helped by working all of my scheduled shifts compounded by the four hour nights of sleep that I have to do to fit all of my reading in. (I am a slow reader.) Anyway, no one wants to hear this; they'd rather have something substantive. Here goes.

In June of this year Britain's main competition regulator, the Office of Fair Trading, launched an inquiry into an alleged tuition-fee cartel at independent (i.e. private) schools. An odd choice of target, perhaps, but the OFT has a wide remit, and can look into any market activity. The investigation is still ongoing, and it reminds me about some thoughts I had on school vouchers. I first read about vouchers in Milton Friedman seminal book Capitalism and Freedom, and I since then I've thought they are a fantastic idea. The questions I have relate to the process of their implemetation. Unless educational outcomes decline appreciably, vouchers are unlikely to be implemented in anything approaching an economist's ideal. What happens if the political/bureaucratic process falls short?

Incentives matter in any market; under a full voucher system, what incentive will there be for parents to the get the best value for money in their children's education? How "fungible" would a voucher be? In the limited voucher schemes that have been tried in the US, the problems are partly dealt with by partly by eligibility restrictions ("failing" schools, for instance) and incomplete funding. Incomplete funding looks to be the main solution to this, similar to the moral hazard problem with insurance contracts, but even with a compensating tax cut a political argument would develop against this on equity grounds. Such criticism has already been levelled against a current British Conservative Party proposal for a "School's Passport" (vouchers in all but name). As with current British university tuition fees, would there be pressure for the government to set a price cap on education? If the voucher is set at a sufficiently high level, but the vouchers are not fungible to some degree, what incentive will parents have to balance value with cost?

There is unlikely to be an entirely free education "market": schools in a voucher scheme are likely to be heavily regulated, with minimum standards to be met and legal requirements to fulfil for disbursement. Administrators are likely, for instance, to impose a form of rationing besides price, on the grounds of preventing parents of being "priced out" of a particular school. Other areas, especially in rural localities, won't have much scope for choice other than home schooling; how will they handle such a case of monopoly? Parent's could always exit and set up an alternative, for instance, but that depends on fungbility again; how easy will it be for a new school to be recognised? Balancing the civil rights issues (say, for instance, that some parents want to set up a madrassa with state funding) and the procedural hurdles could make this process a long one, making the costs of exit higher.

All of the above are mere thoughts, and I have yet to think about a solution to them and the other issues that could arise. There is a voluminous literature on this, relatively little of which I've read, and there are few real-world experiments on the ground. Vouchers are a beautifullly simple idea, but I can't help but think that if instituted there is likely to be a cat's cradle of complexity.