How to Subsidize Education and Achieve Voluntary Integration: An Analysis of Voucher Systems
Reforms in education is currently a hot topic .Many suggestions for reform use elements of Friedman's voucher scheme. According to this scheme parents get a transfer of money (vouchers) from the government, which they must spend on education. But they are free to choose the type of education they want for their children .In particular, they can choose among alternative schools.
Surprisingly, the ideas sketched by Friedman about thirty years ago were not examined in the rigorous general equilibrium tools which are now available. Here I attempt to fill this gap. It is argued that vouchers are not sufficient for successful decentralization: To achieve the socially optimal amounts of educational outputs the government must pay schools for the educational outputs in addition to payments for the employment of students. Once this achievement based system (ABS) is in place, there is no need to worry about school integration: the optimal amount of integration will arise voluntarily, because in the ABS schools face the correct shadow wages for the employment of students.