Class Size and Sorting in Market Equilibrium: Theory and Evidence

Miguel Urquiola and Eric Verhoogen

No 2963, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper examines how schools choose class size and how households sort in response to those choices. Focusing on the highly liberalized Chilean education market, we develop a model in which schools are heterogeneous in an underlying productivity parameter, class size is a component of school quality, households are heterogeneous in income and hence willingness to pay for school quality, and schools are subject to a class-size cap. The model offers an explanation for two distinct empirical patterns observed among private schools that accept government vouchers: (i) There is an inverted-U relationship between class size and household income in equilibrium, which will tend to bias cross-sectional estimates of the effect of class size on student performance. (ii) Some schools at the class size cap adjust prices (or enrollments) to avoid adding another classroom, which produces stacking at enrollments that are multiples of the class size cap. This generates discontinuities in the relationship between enrollment and household characteristics at those points, violating the assumptions underlying regression-discontinuity (RD) research designs. This result suggests that caution is warranted in applying the RD approach in settings in which parents have substantial school choice and schools are free to set prices and influence their enrollments.

Keywords: regression discontinuity; sorting; class size (search for similar items in EconPapers)
JEL-codes: C2 I2 L1 O1 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2007-07
New Economics Papers: this item is included in nep-edu and nep-ure
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Citations: View citations in EconPapers (6)

Published - revised version published as "Class-Size Caps, Sorting, and the Regression Discontinuity Design" in: American Economic Review, 2009, 99 (1), 179–215

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Related works:
Journal Article: Class-Size Caps, Sorting, and the Regression-Discontinuity Design (2009)
Working Paper: Class Size and Sorting in Market Equilibrium: Theory and Evidence (2007)
Working Paper: Class Size and Sorting in Market Equilibrium: Theory and Evidence (2007)
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