Information Asymmetry and Equilibrium Monitoring in Education

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 policy-maker, leading to moral hazard problems. Although households can monitor school effort, they differ in their ability to do so. Since private schools attract high-ability households, both competition and parental monitoring serve to mitigate (but not eliminate) the under-provision of private school effort. In contrast, the public school attracts low-ability households who free-ride in providing monitoring effort. Lower monitoring and monopoly power induce the public school to under-provide effort. Using our calibrated model, we simulate public monitoring of public schools and private school vouchers. While public monitoring in our simulations increases public school effort and attendance, it can also crowd out private monitoring and hence undermine its own effectiveness. In our simulations, vouchers do not benefit low-income, low-ability households because the monitoring they would need to exercise in private schools is prohibitively costly for them. These findings suggest that since neither monitoring-based policies (such as public school accountability) nor choice-based policies (such as vouchers) eliminate the informational asymmetries that lie at the root of underachievement, an effective program may require a combination of both types of tools rather than reliance on any of them alone.