When does it make sense for private companies to provide public services? That was one of the big questions explored by one of this year's winners of the Nobel Memorial Prize in Economic Science, announced on Monday. And some of his work explicitly touched on school choice.
Oliver Hart (Photo: Harvard faculty page)
In its explanation of Harvard University economist Oliver Hart's contributions to the field, the Royal Swedish Academy of Sciences highlighted one of his most influential papers, which showed that when private companies compete to offer public service, they face incentives to innovate and improve. But they also face incentives to cut costs, which can hurt the quality the services they provide.
A 1997 article by Hart, together with Andrei Shleifer and Robert Vishny, showed that incentives for cost reduction are typically too strong. The desirability of privatisation therefore depends on the trade-off between cost reduction and quality. In their article, Hart and his co-authors were particularly concerned about private prisons. Federal authorities in the United States are in fact ending the use of private prisons, partly because – according to a recently released U.S. Department of Justice report – conditions in privately-run prisons are worse than those in publicly-run prisons.
While it raised concerns about privately run prisons, that 1997 paper also considered privatization in other areas, including education. If parents were given vouchers to choose among schools, Hart and his co-authors wrote, schools would be forced to compete by offering better-quality services. As a result, they wrote: "We conjecture that the case for such private arrangements is extremely strong. "
But they also noted concerns that could be ripped from the headlines of today's school choice debates. For example, they dealt with the problem of equal access and cream-skimming.
Critics of vouchers and school choice often point to a particular aspect of quality that they believe would fall as a result of privatization, namely reduction of access of some students to good education. Specically, critics fear that sorting of students by ability would increase as a result of such arrangements, which they regard as socially undesirable. Such sorting can take two forms. First, good private schools paid with vouchers would select the best students, leaving the not-as-good students to not-as-good schools. Second, private schools would avoid expensive-to-educate children altogether, who would then get stuck in residual government programs. Critics charge that such outcomes are less socially desirable than those involving less sorting.
This raised important questions, they concluded, that warranted further research. Among them: "Whether contracts can successfully address the concerns of the critics of school choice."
Enter charter schools.
In the system established in the wake of Hurricane Katrina, almost a decade after that paper was published, New Orleans has created a system that attempts to use contracts — the charter agreements that govern the vast majority of its public schools — to ensure schools serve all children equitably when parents have a choice.
New Orleans uses a common enrollment system and a common expulsion system to ensure that no children fall through the cracks in a system where most public schools are privately managed. Even private school vouchers in Louisiana are heavily regulated, and closely intertwined with the public school system (though some free-market advocates question this approach).
The paper also notes a key parallel between education and health care, where patients typically choose from a mix of public and private hospitals. In short, transparency matters. For choice and competition to work, people need to be able to judge the quality of the services they receive.
One further similarity is that ex post competition between hospitals—letting patients choose their hospital—can play a role in health care. Such competition generally strengthens the case for privatization. However, a crucial difference is the limited ability of consumers to assess the quality of health care they receive. Consumers often cannot tell whether hospitals have failed to provide care to save costs, and hence would not so readily change suppliers in response to poor quality. For this reason, the combination of private ownership and competition would not be nearly so effective in health care as in education, making the case for some government ownership stronger.
School systems in other cities, like Denver and Washington D.C., allow parents choose among schools — some private, some public, some governed by charter contracts.
They're beginning to show that parents do tend to choose schools based on quality, but sometimes they need better information judge quality, or more help navigating their options.
Gradually, the new definition of public education is testing Hart's ideas in the real world.
Hart is most widely recognized for his work on contract theory, and many of his papers are available on his Harvard faculty page.
