Cost Efficiency and Feasibility of Education Policy in the Presence of Local Social Externalities

This paper is a theoretical exercise aimed at developing an economic analysis of an education system in which the educational output - apart from each individual's propensity to invest in himself or the level of per-pupil spending - is heavily conditioned by the way non-monetary inputs (peer effects operating as local social spillovers) are allocated between schools. Our model actually stresses the influence peer effects can exert on the monetary cost of a policy aimed at equalizing achievement. Unequal allocation of these non-purchasable inputs will cause unequal monetary input requirements and under some realistic assumptions we show here that the best way to ensure cost efficiency is to achieve an equalitarian allocation of peer effects (perfect desegregation according to ability level). But the implementation of such a policy raises many difficulties. To get particular families to voluntarily send their offspring to desegregated schools might require some form of bribery.