Contracting For Educational Achievement

We argue that the lack of academic proficiency in K-12 education is due to information asymmetry between the policy-maker, households and schools. The policy-maker is thus unable to write down contracts that ensure proficiency, and must incur agency costs which, in turn, generate other distortions. We develop a theoretical equilibrium model where schools and households choose their efforts in response to the policy-maker’s incentives. We model public schools as one possible response to informational failures. Unlike private schools, public schools separate the roles of financing and consuming education, thus creating rents for public schools. We develop a computational version of the model that allows us to illustrate the distortions and effects from alternative contracts. 1 We thank the Berkman Faculty Development Fund at Carnegie Mellon for financial support. We are grateful to Jane Cooley, Dennis Epple, Randy Reback and Rich Romano for helpful conversations and comments. We also benefited from comments from participants at the 2008 American Education Finance Association. Andrea Cinkovic and Abby Clay Turner provided excellent research assistance, and Jeff Reminga assisted us with the computational aspects of the project. All errors are ours.