The Exclusive Nature of Private Solutions to Public Problems: Evidence from (For-profit) Charter Schools in the US

Abstract

The growing interest in private solutions to social issues poses a critical question: Are these solutions Pareto improving? This is particularly relevant when private providers compete with public actors, potentially reducing the latter’s effectiveness. This paper argues that private solutions to social issues might negatively impact existing public providers in two ways. First, the entry of private providers could diminish support for public providers, leading to fewer resources. Second, private providers, often profit-motivated, might serve more economically viable segments, leaving less viable ones to public providers, thereby increasing the latter’s costs. I explore these mechanisms in the context of US public education, where charter schools (private providers) coexist with traditional public schools (TPS). I find that the entry of charter schools reduces local support for TPS, evident in decreased per pupil local revenues and fewer successful school referenda for additional funding. Furthermore, using a quasi-natural experiment, I demonstrate that TPS grades exposed to charter schools see an increase in the proportion of economically disadvantaged and disabled students. Additionally, I find these effects are more pronounced following the entry of for-profit private providers than non-profits, providing evidence on the comparative efficiency of the non-profit organizational form in addressing social issues where a service must be provided indiscriminately.