SCHOOL CHOICE, COMPETITION, AND PUBLIC SCHOOL PERFORMANCE by Ping Ching Winnie Chan A thesis submitted in conformity with the requirements for the degree of Doctor of Philosophy, Department of Economics, University of Toronto c Copyright by Ping Ching Winnie Chan, 2009 School Choice, Competition, and Public School Performance Ping Ching Winnie Chan Doctor of Philosophy Department of Economics University of Toronto 2009 Abstract Reforms that expand school choice have been the focus of considerable policy interest, not least as a possible means of improving public school performance. According to the standard argument, increased choice will intensify competition, forcing public schools to improve quality in order to retain enrolment. Yet in principle, increased choice need not always raise performance, pointing to the need for careful empirical analysis. A key challenge in measuring the effects of greater choice on school perfor- mance is that convincing variation in choice is often hard to come by, especially in cross-sectional studies. And while school choice policy experiments have the ad- vantage that choice increases in a clear way, few large-scale school choice policies have been implemented in North America. An important exception is the 2002 Ontario tuition tax credit, which eased access to private schools throughout Canada's most populous province. Analyzing the effects of the tax credit reform provides the focus of this thesis. The thesis begins by presenting the literature and gaps in existing research. The next chapter presents a model to clarify the link between increases in competi- tion and school performance, and to motivate the empirical identification strategy. To set the stage for the main empirical analysis, I also provide some relevant in- ii stitutional background relating to the Ontario education policy environment and the Ontario tuition tax credit as well as a descriptive analysis on the Ontario private school market. I then present an initial examination of the possible per- formance effects of the Ontario tuition tax credit using a difference-in-differences setup, before turning to the main empirical analysis, which exploits the differential competitive effects for public schools in districts with relative to those without a significant private school presence. The empirical results indicate that public school performance improved for schools facing the greatest competitive pressures following the introduction of the policy, controlling for a host of other relevant factors. To assess whether the effect is due primarily to increases in productivity, the analysis controls carefully for a series of alternative mechanisms. Overall, the Ontario findings are consistent with increased choice giving rise to productivity improvements in public schools. iii Acknowledgements I would like to express my sincere gratitude to my advisors, Professors Robert McMillan, Michael Baker, and Aloysius Siow for their guidance and support in my graduate studies at the University of Toronto. Professor McMillan introduced me to the interesting and challenging field of the Economics of Education in his Public Economics class and inspired me to undertake this interesting research topic relating to school choice. His great efforts in guiding me through this whole journey helped me to develop the understanding and necessary skills in academic research. There is still much for me to learn, and his teachings will continue to guide me on my road of research in economics. Professor Baker provided me with so much encouragement in the project. Through his comments on this project and working as his research assistant, I have learned the importance of understanding the data. His own work and guidance given to me have showed me the dedicated effort and persistence required in empirical research. Professor Siow provided insights in linking the empirical analysis to theoretical model in this project. His comments shaped the theory section and the measure- ment framework of the project. Through our discussions during the course of the research, he helped me to clarify intuition in the analysis that is presented in the thesis. My graduate studies would not have been the same without the support from iv the faculty and fellow graduate students in the Economics Department at the University of Toronto. I am particular thankful to Professors Dwayne Benjamin, Philip Oreopoulos, Gustavo Bobonis, and Angelo Melino for helpful ideas and suggestions regarding my research. Special thanks to my dear friends Leo Teng Wah, Silvia Mart´ınez Gorricho, Melanie O'Gorman and KaHo Ng for their friend- ship and encouragement. I have also benefited from discussions with Christine Neill, JZ Fan, Qing Hong, Marcelin Joanis, and CEPA seminar participants at University of Toronto and conference participants at the annual meetings of the Canadian Economic Association. I am also thankful to my colleagues at Statistics Canada especially Ren´eMoris- sette, Marc Frenette, and Aneta Bonikowska for their helpful comments and sup- port in this project. I am very grateful to my parents, my brother, and my husband for their love, care, and encouragement. It is their love that strengthens me to pursue my dream. To them I dedicate this thesis. Most importantly, I would like to thank God and Our Heavenly Mother for all the graces that I have been abundantly blessed with. v Table of Contents 1 Introduction 1 1.1 Organization . 3 2 Survey of the Literature 6 2.1 School performance and efficiency . 6 2.1.1 Choice and competition . 8 2.2 The effects of private schools . 8 2.2.1 Catholic school effects . 9 2.3 Measuring the effects of choice . 10 2.3.1 Small-scale randomized voucher studies . 10 2.3.2 Choice within multi-district school systems . 12 2.3.3 Other choice programs within the public system . 16 2.3.4 Evidence from outside North America . 17 2.4 Accountability reforms and choice . 18 2.5 Sorting . 21 2.6 Research question in focus . 24 3 Conceptual Framework: Choice, Competition, and School Per- formance 26 3.1 Introduction . 26 3.2 Model . 27 vi 3.2.1 Agents . 27 3.2.2 Private school behaviour . 29 3.2.3 The game . 32 3.3 Relevance to the empirics . 33 3.3.1 Measuring competition . 33 3.3.2 Sorting . 34 3.4 Empirical implementation . 36 4 The Education Policy Environment in Ontario 41 4.1 Introduction . 41 4.2 Overview of education system in Ontario . 41 4.2.1 Private schools . 42 4.2.2 Ontario education reform between 1995 and 2003 . 43 4.3 The Ontario tuition tax credit . 45 4.3.1 Background . 45 4.3.2 Provisions . 47 5 Data 50 5.1 Introduction . 50 5.2 Public school performance data . 51 5.3 School data . 53 5.3.1 Enrolment data . 53 5.3.2 School characteristics . 54 5.4 Neighbourhood definition . 56 5.4.1 Elementary school attendance area approximation . 56 5.4.2 School attendance areas and census data . 64 5.4.3 Matching of private schools to public schools . 65 6 The Ontario Education Market: A Descriptive Analysis 68 vii 6.1 The Ontario private school market . 69 6.2 Tuition tax credit policy period . 77 6.2.1 Location of private school within Ontario . 78 6.2.2 Private school entry and exit . 82 6.2.3 Private school presence and neighbourhood demographics . 85 6.3 Measuring private school presence . 91 6.3.1 Districts with high vs. low private school presence . 95 6.4 Summary . 97 Appendix . 98 7 The Tuition Tax Credit: A Difference-in-Differences Analysis 103 7.1 Introduction . 103 7.2 Data . 104 7.3 Measurement approach . 109 7.4 Results . 111 7.5 Summary . 113 8 Empirical Evidence from Ontario's Tuition Tax Credit 116 8.1 Introduction . 116 8.2 Measurement framework . 117 8.2.1 Cross-sectional performance . 118 8.2.2 Score-gain specification . 119 8.2.3 Other outcome measures . 120 8.2.4 Instruments for private school presence . 122 8.3 Public school performance measure . 123 8.4 Results and Discussion . 126 8.4.1 Cross-sectional analysis . 127 8.4.2 Score-gain specification . 130 viii 8.4.3 Endogeneity . 138 8.5 Robustness . 144 8.5.1 Secular vs. Catholic schools in Ontario . 151 8.6 Summary . 152 Appendix . 155 9 Conclusion 161 References 165 ix List of Tables 5.1 Data summary (time-varying control variables in levels) . 55 5.2 Public school resource analysis, 2000/2001 and 2001/2002) . 57 5.3 Data summary (time-constant control variables in levels) . 66 6.1 Average private school tuition fee, religious vs. non-religious schools 75 6.2 Number of Ontario private schools from 2000/2001 to 2003/2004 . 80 6.3 Population-adjusted Ontario private elementary enrolment measure 81 6.4 Entry and exit of private schools in 2001/2002 to 2003/2004 . 83 6.5 Distribution of private schools offering elementary grades at census dissemination area (DA) level . 85 6.6 Probit analysis to the presence of private school at dissemination area level . 92 6.7 Summary statistics of private school enrolment share at public school attendance area . 94 6.8 Average neighbourhood characteristics at public school attendance area, high vs. low private school presence . 96 6.9 Regression analysis of private school enrolment share at the ap- proximated public school attendance area . 99 6A-1 Listed tuition fee from a sample of Ontario private schools . 100 7.1 NLSCY sample distribution . 105 7.2 Descriptive statistics (N = 4; 371 in each cycle) . 106 x 7.3 Descriptive statistics of the Ontario sample (N = 1; 043 in each cycle) . 107 7.4 Baseline difference-in-differences analysis . 112 7.5 Difference-in-differences analysis, lower vs. higher grades . 114 8.1 Summary statistics for public school performance measure . 125 8.2 EQAO Grade 3 Ontario public school performance level analysis .