Andrabi, Tahir, Jishnu Das, Asim Khwaja, Selcuk Ozyurt, and Niharika Singh. 2018. “Upping The Ante: The Equilibrium Effects Of Unconditional Grants To Private Schools”.
We test for financial constraints as a market failure in education in a low-income country by experimentally allocating unconditional cash grants to either one (L) or to all (H) private schools in a village. Enrollment increases in both treatments, accompanied by infrastructure investments. However, test scores and fees only increase in H along with higher teacher wages. This differential impact follows from a canonical oligopoly model with capacity constraints and endogenous quality: greater financial saturation crowds-in quality investments. Higher social surplus in H, but greater private returns in L underscores the importance of leveraging market structure in designing educational subsidies.