Mickey D's in Education?

If, as I expect and pray for, voucher systems continue to be expanded and implemented around the country, several questions will become important.  One of them is, what form will private voucher schools take?  Will they (and should they) all be independent schools?

A recent article in the Cato journal Policy Analysis deals with this issue in an intriguing way.  Economists Gregory Elacqua, Humberto Santos, Dane Contreras, and Felipe Salazar have done a study of Chile's national voucher system comparing three of the most common sorts of schools there: public schools, independent private schools, and franchise private schools.  By analyzing the results from national tests, the authors came up with some remarkable and intriguing results.

As the authors note, it is not clear a priori what the optimally efficient size of any school operation is.  One might argue that large operations -- school chains or franchises -- would be optimal, for several reasons.  First, a chain of schools might lower per-student costs by economies of scale (by buying supplies in bulk, for example) which would in turn liberate financial resources for classroom purposes (better teachers, more equipment, etc.).  A school chain might also be able to attract more private capital, and to quickly gain community recognition and support.

These possible advantages, the authors note, seem to have been behind the trend in America towards consolidation of public school districts (which have dropped in number by 90% over the last seventy years or so), as well as the growth of privately run charter school chains such as the Edison Schools (which have grown from 200 schools in 1995 to 3,600 in 2006).

But Elacqua et al. note that large chains also face potential drawbacks, including a greater propensity towards bureaucratization (the "diseconomies of scale") and a lesser degree of community involvement.  There is also the fear that larger aggregations would reduce innovation and increase standardization.

The authors point out that studies of American schools face methodological limitations (such as the lack of randomization) and a paucity of data (since there are still relatively few voucher systems in the country, and even fewer private school chains).

However, Chile affords us a richer data set.  In 1981, Chile -- under the sway of the "Chicago Boys" -- converted nationwide to a voucher system created back in the 1970s.  (The Chicago Boys were a group of policy advisers to the government; they had gotten Ph.D.s from the University of Chicago when Friedman was still there.)

The Chilean national voucher program started in 1973.  By 1979, 12% of Chilean K-12 students went to voucher private schools, and another 7% went to unsubsidized (i.e., purely tuition-based) private schools -- typically very elite prep schools.  By 1990, 32% of Chilean K-12 students went to private voucher schools.  And by 2009, 48% of them were in private schools, with 7% still opting for the unsubsidized private schools.

As an aside, we should note that the Chilean experience disconfirms an objection by some libertarians to vouchers, one that elsewhere I have called "the Trojan Horse argument."  This argument is that a voucher system, far from being a device that allows students to escape from public schools, is instead a tool that allows public-school bureaucrats to extend their tentacles to private schools.  There are a number of reasons I give to think that the objection is wrongheaded, which I will not rehash here.  The point to note here is that Chile's experience is that even with the adoption of a national system of vouchers, one that increased the number of private schools enormously, private schools that wished to stay wholly separate easily did so.

Let us return to Chile's current school structure.  Of the private voucher schools, about 70% are single independent private schools, and about 30% of them are chains, a breakdown that has remained fairly constant over the last decade or so.  Of the private-school chains, almost half comprise four or fewer schools.  And of the chain schools, about 42% are for-profit institutions, and 58% non-profit (typically religious ones, or ones run by non-denominational foundations).

So the researchers have hit upon a useful data set: the performance of Chilean 4th-graders in public, private voucher chain, and private voucher independent schools.  Using this data, they conclude that "all things being equal, private voucher franchise schools are more effective than private voucher independent and public schools."

That is, even after correcting for "school choice bias" (i.e., that private voucher schools may attract better students than do public schools) and "parental choice bias" (i.e., that private voucher schools attract parents more ambitious or supportive of education than do public schools), students at private voucher chains outperform those at independent voucher private schools.  This holds true even when you correct for the fact that Catholic schools outperform public schools when all other factors are held constant.

To be precise, the authors found three things.  First, they found that there was virtually no significant difference between public schools and private voucher schools, when you hold gender, parental educational and income level, and other such factors constant.  This is consistent with what the theory of vouchers would predict: that when you empower parents and children to go to private schools, it forces the public schools to improve their services to match the new competition.

Second, the gap between private voucher chains and independent voucher private schools was significant: between 0.086 and 0.108 standard deviation on test scores, in favor of the chains.

Third, again, all other factors held constant, the larger franchises (four or more schools) recorded higher achievement than the smaller chains (three or fewer) did.

My main criticism of this valuable paper is that it doesn't clearly distinguish between "chains" and "franchises."  A chain -- such as Macy's or Walmart -- consists of stores that are not independently owned, but instead owned and run by one corporation.  There are usually site managers, but they are all employed directly by the corporation.

By contrast, a true franchise -- such as McDonald's or 7/11 stores -- is a group of stores ("franchises") independently owned and managed, which "lease" the franchiser company's logo, its product line brands, and its managerial techniques.  The franchisee (an individual or group of investors) puts up a large amount of capital, incorporates, negotiates a contract with the franchiser corporation, and is granted exclusivity in a defined area.  The franchiser then typically trains the franchisee management and staff to some degree or other, and then receives a continuing payment (usually some percentage of the franchisee's gross revenues).

Chains and franchises are thus profoundly different.  In a franchise, the fact that the franchise owner has his own skin in the game helps insure that the local staff will work efficiently.  But it also limits the ultimate profits of the parent corporation, which in turn may limit what efforts it will be willing to extend on the franchisees' behalves.

It would have been helpful to see an analysis of the performance of chain schools compared with (independently owned -- that is, true) franchise schools, if there are any.

But aside from that quibble, I believe that Dr.  Elacqua and his co-researchers have done us all a service in advancing the school choice debate.

Philosopher Gary Jason is a contributing editor to LibertyUnbound and the author of the forthcoming book Dangerous Thoughts.