Summary: 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.

Upping the Ante: The Equilibrium Effects of Unconditional Grants to Private Schools

Citation: Andrabi, Tahir, Jishnu Das, Asim I. Khwaja, Selcuk Ozyurt, and Niharika Singh. 2020. "Upping the Ante: The Equilibrium Effects of Unconditional Grants to Private Schools." American Economic Review, 110 (10): 3315-49.

Tahir Andrabi

Jishnu Das

Asim Khwaja

Selcuk Ozyurt

Niharika Singh

Low-cost private schools have multiplied 15-fold in Pakistan since 1980, accommodating over one-third of all primary school children. Over the same period, primary school enrollment has doubled, reaching nearly 100% (UNESCO 2015). Despite these huge gains in enrollment, school quality continues to lag behind. One important challenge inhibiting quality among private schools may be lack of cash to make improvements. To test the role of financing on school behavior, we experimentally offer an unconditional grant of $500 (a large amount equal to roughly 15% of a school’s annual revenue) to 342 private schools in 188 villages. To explore whether schools react differently when other schools also receive the grant, we give the grant to only one school in some villages (one-financed) and in other villages, we give grants to all schools (all-financed). Our design allows us to assess whether the context in which financing is offered affects how schools use the grant money.

Our results show that in all villages, schools who received unconditional cash grants both make more money and spend more money. However, there are significant differences in how the money was earned, what it was spent on, and the extent of quality improvements between one-financed and all-financed methods.

Study Design and Findings

Schools show that they need financing

We found that school owners immediately invested in their school after receiving a grant. In most cases, school owners immediately began upgrading rooms, furniture, and fixtures. In all-financed villages, they additionally upgraded classrooms, libraries, sports facilities, and increased teacher pay—investments that may affect learning quality more directly. If school owners did not imminently need cash for their school, they seemed to delay investing in their school and used the grant to pay off more expensive loans instead.

When one private school in a village received a grant, its revenues increased

In low-saturation villages where only one school receives a grant, we find on average that these schools’ enrollment and revenues increased after they spent the grant money. In one-financed villages, the grant recipient schools added 19 more students on average (a 13% increase) and increased their revenues by over 20%. We argue that when a school knows that it is the only one financed, it tends to expand capacity to include children who may have otherwise dropped out or never enrolled in school. Significantly, they choose to avoid ‘poaching’ students from competing schools, which risks triggering a price war. The demonstrated increase in school revenue shows that private sector lenders may be able to obtain significant returns from investing in low-cost private schools.

When all private schools received grants, revenues and quality both increased

By contrast, we find that when all schools in a village receive financing (as opposed to just one school); they begin to invest in quality of education rather than just fixed investments, to remain competitive in the village’s educational marketplace. These schools show an increase in their average test scores; along with increases in enrollment and average fees. Consistent with theory, this shows that schools that know their competitors have been financed too have a greater incentive to invest in quality improvements alongside extending capacity, to avoid a price war over the same set of students. These schools additionally demonstrate higher investment in teachers through increased salaries. Therefore, we argue that there is a higher social impact from allocating grants to all schools in a village, as opposed to just one.

Our results show that alleviating the financial constrains of private schools by providing unconstrained grants leads to significant gains in enrollment and learning. However, just as important is our finding that the method of financing matters as much as the financing itself. When all schools in a market receive grants, they have a greater incentive to invest in quality than when a sole school receives financing. Our results also indicate that the financial returns to investing in the low-cost private education sector are large and above normal market lending rates, especially in the low-saturation case. This shows that lending institutions could potentially achieve high returns from overcoming the widespread perception that lending to low-cost private schools is risky.

Study Resources

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As a condition of use, please cite as: Andrabi, Tahir, Jishnu Das, Asim I. Khwaja, Selcuk Ozyurt, and Niharika Singh. 2020. "Upping the Ante: The Equilibrium Effects of Unconditional Grants to Private Schools." American Economic Review, 110 (10): 3315-49.

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