December 1994.

Arguments in favor of school choice depend on the idea that competition between schools improves the quality of education. However, we have almost no empirical evidence on whether competition actually affects school quality. In this study, I examine the effects of inter-school competition on public schools by using exogenous variation in the availability and costs of private school alternatives to public schools. Because low public school quality raises the demand for private schools as substitutes for public schools, we cannot simply compare public school students' outcomes in areas with and without substantial private school enrollment. Such simple comparisons confound the effect of greater private school competitiveness with the increased demand for private schools where the public schools are poor in quality. I derive instruments for private school competition from the fact that it is less expensive and difficult to set up religious schools, which accounts for 9 out of 10 private school students in the U.S., in areas densely populated by members of the affiliated religion. I find that greater private school competitiveness significantly raises the quality of public schools, as measured by the educational attainment, wages, and high school graduation rates of public school students. In addition, I find some evidence that public schools react to greater competitiveness of private schools by paying higher teacher salaries.

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