School Choice and the Flight to Private Schools: To What Extent Are Public and Private Schools Substitutes?

Opponents of school choice sometimes charge that vouchers, charter schools, and tuition tax credits would strip funding and talented students from the public schools. Proponents say this is exactly what is needed to provide extra competition for public schools. Flight to private schools may happen if parents think private schools are good substitutes for public schools. For goods with explicit market prices, economists estimate substitutability by specifying a demand curve and finding a cross price elasticity, but the non-market nature of schooling has prevented this. The current study finds a way to estimate the demand for public schooling and calculate a cross price elasticity by exploiting Rosen’s (1974) two-stage hedonic technique. It estimates the cross price elasticity between public schooling and the price of private schooling to be 0.32: Americans view private schools as fairly weak substitutes for public schools. The use of spatial statistics accounts for potential spillovers and omitted variable bias in the house price hedonics and the demand curve estimation. In fact, the -1.72 price elasticity of demand is much larger than the -0.20 to -0.40 estimates generally found by non-spatial studies.