Summary: Using unique data from Pakistan we estimate a model of demand for differentiated products in 112 rural education markets with significant choice among public and private schools. Families are willing to pay substantially for reductions in distance to school, but in contrast, price elasticities are low. Using the demand estimates, we show that the existence of a low fee private school market is of great value for households in our sample, reaching 2% to 7% of annual per capita expenditure for those choosing private schools.
The Value of Private Schools: Evidence from Pakistan
Citation: Carneiro, Pedro, Jishnu Das, and Hugo Reis. 2022. “The Value of Private Schools: Evidence from Pakistan”, Review of Economics and Statistics, 1-45.
Pedro Carneiro
Jishnu Das
Hugo Reis
Rising private school enrollments in low income countries have prompted a range of government responses, from active support through subsidies and partnership arrangements, to onerous regulation, sometimes at the same time. The lack of a coherent response reflects, in part, a limited understanding of how households make schooling choices and how educational markets function in low-income countries. This is an area where approaches from industrial organization (IO) can play a central role, as long as estimation methods developed for product markets can be extended to education. In particular, market boundaries may not be clear, objective functions (for both consumers and firms) can be hard to define and, critical data such as the costs of running a school may not be available.
Our goal is to assess how a careful understanding of the demand for private schools can be used to inform policy in low-income settings. In order to do so, we use data from the Learning and Education in Pakistan Schools project. These data are from 112 villages in Pakistan, where each village is a different education market with an average of 7 public and private schools, allowing us to delineate markets clearly. Private schools are minimally regulated and did not receive public subsidies at the time of data collection, and the data include specialized surveys in both schools and households. At the time of data collection, prices in the private sector therefore reflected conditions in the local market; public schools were, and continue to be, free at the point of use. Parents could choose among all schools as long as they could afford the fees of the school they chose.
Study Design and Findings
Distance between home and school is a key input in the school choice decision
Our demand model shows, first, that a central determinant of school choice in this setting is the distance to school. The average distance between home and school (for those enrolled) is 510 meters for girls and 680 meters for boys. A 500 meter increase in distance decreases the likelihood that a school is chosen by 11.1 percentage points for girls, and 6.0 percentage points for boys. For boys, parents are willing to pay more than a full year of private school fees of $13 for a 500 meter reduction in distance, while for girls this value reaches 74% of annual school fees.
Parents value other school characteristics, notably the test scores of peers and school infrastructure, but their value is lower than that placed on distance. For instance, they are willing to pay 13% to 25% of a full year of private school fees for extra facilities and, they are willing to pay 12% to 31% of average annual tuition in a private school, for a 1 standard deviation increase in the test scores of their peers.
Families are not very sensitive to the price of private schools
Own-price elasticities of -1.12 for girls and -0.37 for boys, are low. These reflect the change in demand when a single school increases its price; sectoral price elasticities, which reflect the increase in demand from a reduction in the price of all private schools are -0.27 for girls and -0.10 for boys. The low sectoral price elasticities run counter to the belief that prices are the main barrier to private schooling in low-income countries. Therefore, we returned to the same households 14 years later and offered a one-year price discount for children of school-going age if they attended private schools in the village, varying the price discounts experimentally. Although the experimental and structural estimates are not strictly comparable due to the length of the price discount, we find surprisingly and similarly low price elasticities in the experiment as well.
Families value having the choice of a private school
We show that for the set of students choosing private schools, the value of private schooling is USD$3.4 for girls and USD$ 11.0 for boys, which corresponds to 2% and 7% of their total annual per capita expenditure. If we consider full universe of students, which includes those choosing public schools or no school at all, these figures are lower (USD$1.4 and USD$4.8 or 1% and 4% of annual per capita expenditure). Extrapolating our estimates from rural Punjab to the entire country, the total value of private schools in Pakistan is estimated to have been at least $138 million in 2003.
The impact of vouchers is smaller than speculated
We examine the potential impact of vouchers, which we simulate as a reduction to zero in the price of attending any private school. Such a voucher would cost $13 for each student who uses it, and would increase private school enrollment for girls from 19% to 40% and for boys from 23% to 31%. Since most children never use the voucher, the implied per capita cost of a voucher in the whole population is $5.2 for girls and $4.0 for boys, relative to a valuation of $2.7 and $2.4 respectively. In addition, there is a further reduction in society’s direct costs of schooling of $3.3 for girls and $1.4 for boys, resulting from a shift of children from public schools (where costs per student are higher) to private schools. As the implementation of a voucher system at scale would have to pay for children who would have chosen private schooling even without a subsidy, the difference between the cost and the welfare gain provides one estimate of what the shadow value of market failures (such as credit constraints) must be for such schemes to increase welfare.
Low cost private schools have expanded school choice to very poor areas, and in many countries more than half of total school enrollment is in private institutions. These are all environments where parents are, on average, poor and relatively less educated, but make active schooling decisions, often choosing to opt out of the free public school system. In order to understand the importance of private school markets for education in poor countries, we need to understand the parameters driving the demand and supply of private schooling in such settings. This is a central issue in the economics of education, where the roles of choice and competition in the provision of education are increasingly discussed.
Our demand estimates and policy simulations from Punjab, Pakistan highlight why such exercises are critical for policy. Parents value private schooling, but not the product differentiation that occurs when there are multiple private schools in the same village. Further, a voucher program in this setting has some effect on private and public enrollments, but not as large as is usually imagined. These exercises relate to fundamental issues in the economics of school choice and help inform important policy choices that governments are currently debating.
Study Resources
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As a condition of use, please cite as: Carneiro, Pedro, Jishnu Das, and Hugo Reis. 2022. “The Value of Private Schools: Evidence from Pakistan”, Review of Economics and Statistics, 1-45.
Willingness to pay for school characteristics (girls)
Willingness to pay for school characteristics (boys)
Elasticity of enrollment with respect to school fees
The number of public and private schools built each year
Individual and Household Statistics