Public Disclosure Authorized

___VVPs 11q

POLICY RESEARCH WORKING PAPER 1795

Public Disclosure Authorized

W hat Educational The misallocationof public

sector educational spending
Production Functions acrossinputs that leadsto
Really
Show underspending
on productive
Really Show inputs
likebooks
instructional
materials and facilities is due

A Positive Theory of Education to politicalforces-and thus

Public Disclosure Authorized

Spending requires political solutions

Lant Pritchett
Deon Fdlmer
Public Disclosure Authorized

The World Bank

Development Research Group
Povertyand Human ResourcesE
July 1997
LLcy RESEARCH WORKINGPAPER1795

Summary findings
The accumulated results of empirical studies show that
the public sector typically chooses spending on inputs
such th-at the productivity of additional spending on
books and instructional materials is 10 to 100 times
larger than that of additional spending on teacher inputs
(for example, higher wages, smaller class size). Pritchett
and Filmer argue that this pervasive and systemic
deviation of actual spending from the technical optimum
requires a political, not economic or technical,
explanation. The evidence is consistent only with a class
of positive models in which public spending choices are
directiy influenced by a desire for higher spending on
teacher inputs, over and above their role in producing
educational outputs. This desire could be due either to
teacher power, or bureaucratic budget-maximizing
behavior, or political patronage. Pritchett and Filmer
conclude by exploring the implications of these positive
political models of educational spending behavior for
various types of proposed educational reforms (localized
control, parental participation, vouchers, and so on)
which requires an examination of how the proposed
reforms shift the relative powers of the stakeholders in
the educationaL system: students and parents, educators,
bureaucrats, and politicians.

This paper - a product of the Poverty and Human Resources, Development Research Group - is part of a larger effort
in the department to understand and improve the efficacy of social service provision. The study was funded in part by the
Research Support Budget under the research project "Rationale for Education Reform" (RPO 681 -12). Copies of this paper
are availabie free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Sheila Fallon, room
N8-030, telephone 202-473-8009, fax 202-522-1153, Internet address sfallon@worldbank.org. July 1997. (53 pages)

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about
development issues.An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The
papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this
paper are entirely those of the authors. They do not necessarilyrepresent the view of the World Bank, its Executive Directors, or the
countries they represent.

Produced by the Policy Research Dissemination Center

What EducationProduction FunctionsReally Show:
A Positive Theory of EducationExpenditures

Lant Pritchett

DeonFilmer
 What EducationProductionFunctionsReally Show:
Towards a PositiveTheory of EducationExpenditures'

Introduction

There is broad consensusthat expansionin the skills, knowledge,and capacitiesof

individuals--increasinghuman capital-- is a key element in economicprogress and raising

living standards. Schoolingwithin formal educationsystemsplays an important role in the

expansionof human capital and governmentsand internationalfora have often made explicit

targets for the expansionof schooling in enrollmentor targets for expenditures. However,

there is a big differencebetween children sitting in a classroomand an increase in human

capital. The quality of educationis a deep concern in many developingcountries. On

internationallycomparabletests some developingcountries, such as Korea and China, do quite

well, but others do abysmally2. In some countriesstudents' achievementtest scores after years

of instructionare little better than randomguessing. If these quality deficiencieswere due

merely to the lack of inputs the policy prescriptionwould be obvious: increaseresources.

However, a cumulationof empirical literatureusing comparisonsof student performance

across countries, across regions within countries, and across schoolswithin regions

' We would like to thank MarlaineLockheed, EmmanuelJimenez, ElizabethKing, Harold

Alderman, Michael Kremer, and Jonah Gelbachfor helpful commentsand discussion.

2 On the comparisonof reading performanceof 10 years olds, Venezuelaand Indonesia

were an amazing6.5 standarddeviationsbelow the average of the developedcountries. On a
similar assessmentof scienceperformanceof 10 year olds, studentsfrom Nigeria and the
Philippineswere 2.6 and 3.7 standarddeviationsbelow the developedcountry mean.
consistentlyproducesthe puzzlingand worrisomefinding that resourcesare only tenuously

related to measuredachievement.

In this paper we build on Hanushek's (1995) argumentthat since budget differencesdo

not account for performance,the incentivesthat determinehow well the budget is spent must

play an important role. We argue the evidence is grossly inconsistentwith the assumptionthat

resources are allocatedto maximizeeducationaloutput (howeverdefined). The key indicator

of this misallocationis that the cost effectiveness,or achievementgain per dollar, of teacher

related inputs is orders of magnitudelower than alternativeinputs. Relative overspendingon

inputs that are of direct concern to teachers is so pervasivethat it is consistentonly with a

model of the allocationof education spendingin which teacher welfare influences spending,

over and above its impact on schoolquality.

When performanceis more a function of incentivesthan of spendingthe policy

implicationsare less obvious. While in some cases merely increasingthe budget is the

appropriateeducationalpolicy, it is increasinglyrecognizedthat in many other situationsmore

fundamentalreforms that enhance the importanceof outputs of education in spendingdecisions

are necessary (Inter-AmericanDevelopmentBank, 1996).

We want to stress that althoughwe argue that the evidence is consistentwith enormous

inefficienciesin educationspendingdue to relativelyhigh spendingon teacher inputs, this

should not be construed as an attack on teachers, who are the backboneof any educational

system. But "government"actions are neither deus ex machinanor satanas ex machina, but

the result of the interactionof differing interests. Suggestingthat educatorsdefend their

interests is a methodologicalassumptioncommonto all economics,not an ad hominemattack.

2
Just as there are "marketfailures" intrinsicto the incentivesof decentralized,uncoordinated

exchange, there are "governmentfailures"which are equally inherent in the structure of

incentivescreated by allocationthrough the politicalprocess3 . The politicalpressures on the

allocationof expendituresacross functionalcategoriesthat we explore here for educationare

almost certainly present in other sectors: healthclinics with personnelbut withoutdrugs or

needles, or highwayswithout maintenanceare depressinglycommon.

T)Theories of the allocation of expenditiures

This sectionfirst explains why a behavioraltheory of expenditureallocationis

important for understandingthe results of empiricalexaminationsof the determinantsof

educationaloutcomes. One such theory, an output maximizingmodel is presentedalong with

three variants: a simplesingle educationaloutput, a model with uncertainty,and a model that

accommodatesmultiple educationaloutputs. We then introducean alternativemodel of

expenditureallocationsin whichboth educationaloutputs and teacher welfare enter directly

into the determinationof spending.

A) Why it takes a theory

3 Althoughit shouldbe pointedout this trend in consideringmarket and govermnent

failures is a renewed, not new, interest for economists:

It is not sufficientto contrastthe imperfectadjustmentsof unfetteredprivate enterprise

with the best adjustmenteconomistsin their studiescan imagine. For, we cannot
expect that any State authority will attain, or will even whole heartedly seek, that ideal.
Such authoritiesare liable alike to ignorance, to sectionalpressures, and to personal
corruption by private interest (Pigou, 1912).

3
 Productionpossibilitiesare determinedby an underlyingtechnologicalprocess. The

maximumamount of output possiblefor an amountof inputsgiven the constraintsimposedby

the underlyingtechnicalprocess is the "productionfunction." The relationshipbetweenplant

growth and water or sunlightor fertilizeris determinedby a biologicalprocess, the

relationshipbetween coal burned and heat producedis determinedby a physical process.

Similarly, applying the metaphorto educationone can talk of the educational"production

function"which is determinedby an underlyingpedagogicalprocess.

Even though the productionfunction is derived from technical, not behavioral

relationships,one needs a behavioraltheory to understandthe results of estimatinga

production function for two reasons. First, the incrementto output from additionalinputs is

not constant. The second algebra book per studentwill likely help less than the first, and the

tenth much less (perhapseven have a negativeimpact). The contributionto output of an input

depends on the rate of inpututilizationat which it is assessed. Nearly all education production

function studies are not experimentsin whichinput use is chosen by a researcher,but rather

use data drawn from reality. In reality, the spendingon inputs (e.g. teacher wages, class

sizes, buildings, textbookuse) is chosenfor reasons other than research and since input use is

chosen, the theory of the input choicepredicts the observed input productivityand guides the

interpretationof results.

This is particular important in educationalresearch, as there is a crucial distinction

between testing whether inputshave low productivityat their current rate of applicationversus

testing whether they are "inputs" at all. One could study the effect of either fertilizer or

Mozart piano concertoson corn production. Even though at sufficientlyhigh rates of

4
applicationthe size of fertilizer's impact could be small (or even negative),fertilizer is clearly

an input, and the only questionis the magnitudeof the impact. On the other hand, Mozart's

music, while delightful,might not be an input into corn production, in the sense that it has

zero corn production impact across all soil conditions, concerti, and volumes.

Teachers, classrooms, and instructionalmaterialsare clearly inputs into education. If

one understandsthe statisticaltests of whetherthe effect of class sizes or teacher wages are

different from zero as tests of whetherthese inputs ever matter (as with Mozart music) the

whole endeavorappearssilly and pointless (which in fact has often been the reaction of the

educationcommunityto this line of empiricalresearch). However, as the model described

above suggests, a failure to reject zero marginalproduct of higher teacher wages or reduced

class sizes may simplymean that the rate of applicationis so high that the marginalproduct at

the chosen rate of applicationconditionalon other inputs is (statistically)indistinguishable

from zero.

Second, as discussedin sectionIII, the policy implicationsof empiricalfindings depend

criticallyon the theory behind the data. If the input use is the result of some endogenous

politicalprocess, changesin input use may not be feasiblewithoutchanges in the underlying

process that determinesbudgets. Simplestatementslike "spendmore on input x" are not

necessarilyvaluablecontributionsto policy making when policies are politicallydetermined.

R) A plaugible(at leaqt to economists) theory, with variations

Variation 1: Simple output maximizing. How would someone fully informed about the

production function allocate spendingof a fixed budget across inputs to maximizeoutput (or,

5
equivalently, allocate inputs in order to minimize the input costs of a specified level of

output)? If educational output is denoted by S and is related to educational inputs (e.g. books,

teachers, desks) denoted as elements xi of a vector X, each of which has a price pi, according

to a technically determined production functionf s, then the maximization problem subject to a

fixed money budget B is:

Maximize S = fs (X)

s.t. p'X=B

The assumption that inputs are allocated in this optimizing fashion creates very strong

predictions about the results of estimating educational production functions. Whatever the

budget, inputs should be allocated such that the marginal product per dollar (MPPD) is

equalized across all used inputs. That is, the first order conditions are4 :

' fS = 0, V ij (1)
Pi pi

-whichmeans that the ratio of the marginal products in the production function should be

exactly the same as the ratio of the prices, or the increment to educational output per dollar, or

technical cost effectiveness spent, should be exactly the same for each input5 .

4 These are the conditions for an interior maximum involving some use of inputs i and j,

5 This is of course the old (and by now obvious) condition for economic efficiency in any
endeavor. As Frank Knight pointed out in 1921 "In the utilization of limited resources... we
tend to apportion our resources among the alternative uses that are open in such a way that
equal amounts of resource yield equivalent returns in all fields."

6
 Two objectionsto this simplemodel can be incorporatedas more or less minor

variations of the optimizingmodel: first, that those allocatinginputs are not fully informedand

second, that schoolingcannot be characterizedas a singleoutput.

Variation2: Optimizingwith uncertainty Somemight claim that the person allocating

the inputs is trying to maximizethe test score incrementfrom spendinga fixed budget but the

'true" educationalproduction function is a very complexthing about which the chooser knows

very little. That the educationalproductionfunction is complexis almost certainly true as the

underlyingpedagogicalrelationships,like any relationshipsthat involvepurposive human

behavior, are enormouslycomplicated. The exact processesand proceduresfollowed inside

the classroom, includingalmostintrinsicallyunobservablefactors such as the match of the

personalityof the teacher and the student, certainly matter for educationaloutcomesin ways

that will be impossiblefor any large sampleempiricalresearch to capture. Moreover, there

are bound to be interactionsbetweenvarious inputs which will be very difficult to empirically

specify.

However, no matter how complexthe true function, the situationcan be formally

characterizedby assumingthe person makingthe allocationdecisionbelieves that on average

the true relationshipis some productionfunction, g. Therefore, the optimizingallocationwill

be such that:

s s
1_ zQgj
0 V ij (2)
Pi pi

7
that is, the persondecidingon the allocationbelieveshe or she is equalizingthe marginalproducts

per dollar in the productionfunction.

Variation3: Optimizingwith multipleoutputs A second objectionis that many would

allege that researchersare missinga large part of what schoolsare all about with their narrow

minded obsession with test scores6 . In every societyschoolsare meant to transmitmore than

information:they also transmitexpectedand acceptablepatterns of social interactionand

cultural norms and beliefs (Piccioto, 1996). Moreover, parents, children and society at large

care about many more featuresof a schoolthan just the improvementthey provideto test

scores: the pleasantnessof the environmentin general (e.g. personalsafety), non-academic

culturalopportunities(e.g. music), non-academicrecreationalopportunities(e.g. sports),

equalizationof outcomesacross studentswith differentinnateabilities (e.g. remedial education

spending).

However, in spite of the complexity,this situationcan also be formally characterizedas

a variation on the optimizingmodel. Supposethat the objectivefunction involvestwo outputs:

test scores, S, and some measureof non-academicoutput, C (C for "Citizenship"or "Culture"

or "not being a Criminal"). In this case the optimizingproblem is to maximizethe total value

of all school output subjectto the productionfunction for each of the outputs and the budget

constraint(expandingthis set-up to includemore than two outputs or to allow a non-linear

6 Since most researchershave been selected(self or otherwise)to be researchers at least to

some extent on the basis on their performanceon test scores during their academiccareer this
obsessionis perhaps understandable.
8
objectivefunction would also be straightforward). That is, inputswill be allocatedin order to

maximizethe value of:

S(X) + P,C(X)

subjectto the productionfunctionsfor S and C:

S =fs (Xs Xc )
C = hc (Xs, Xc)

and the budget constraint.

The first order conditionsfor an interior maximumin this case imply that the marginal

product of each input in the productionof each output ("scores"and "citizenship")will not be

equalized. The way these vary will depend on both the relative value placed on the two

outputs (pa)as well as the relative marginalproducts and prices of the various inputs.

fiS _ fi = pC*[ - ]3)

Pi Pi P Pi

This model impliesthe marginal productper dollar in producingscores at the optimumwill be

differentif the marginal productsof inputs in producingscores and "citizenship"is different.

If one input is relativelymore productive in the productionof "citizenship"then its input use

will be higher (and hence marginal productper dollar in scores production lower) than if one

were optimizingover scores alone.

While this has been presentedas a normativemodel, what a person shoulddo if in fact

they wanted to optimize, the simplestbehavioralmodel of the allocationof spendingis to

9
assume the normativemodel is thepositive model. That is, just assume that the chooser

actuallybehaves as if he/she were optimizing. While this assumptionis heroic, it is implicit

(and sometimesexplicit) in nearly all educationalproductionfunctionresearch7 .

C) A new positive model of expenditure allocations

Very few people would accept the optimizingmodel as a completeor accurate

descriptionand in fact the productionfinction has had very little empirical successin

explainingschool performance. However, sincethe intuitivefoundationsare so clean and

attractivethe difficultyin rejecting the optimizingmodel is proposinga specific, concrete,

alternativeagainstwhich to judge it. Therefore, before turning to the empirical evidencewe

propose a very simplealternativemodel, which embedsthe optimizingmodels as a special

case.

Supposethe person allocatinginputs acceptsa certain budget as fixed and maximizesa

weightedaverage of the utility of school outputS(X) and teacher's utilities T(X)(expressedin

units of test scores). The impliedobjectivefunction is:

C(X) = (I-a)*S(X) + a*(X)

7 To estimate and interpretthe cost function as the dual of the production functionrequires
the assumptionof maximization(Jimenez, 1986, Jimenez and Paqueo, 1996, James, King and
Suryadi, 1996).
10
where a, the weight given to teacher utility, lies between 0 and 1. In this set-upthe outcome

depends not only on the underlyingproductionfunctiondeterminedby the pedagogicalprocess

but also on the structure of the teacher's utility function8.

The simplestway to formalizethis is to think of the teacher's utility as the sum of two

components:the utility derived directlyfrom spendingon educationalinputs and that derived

from greater educationaloutput. The teacher utility derived directlyfrom educationalspending

depends on how the spendingon those inputseffects their own welfare independentlyof its

effect on scores. For instance,higher teacher wages raise direct teacher utility dollar for

dollar, while spendingon physical amenitieswithin the school (like larger classrooms)or

spendingon reducing workload (like smaller classes)would raise teacher welfare, but not by

the equivalentof an unrestricteddollar given to the teacher, and spendingon items like books

or desks for studentswould have zero (or near zero) impact on direct utility. Teacherutility

also depends, through altruismor professionalism,directly on educationaloutput. The total

teacher utility function is:

T(X) = (1-6)*U(Y'X) + (8)*S(X)

where UO is the direct utility derived from inputs, y is a vector which gives a weight to each

of the inputs (weightswhich lie between0 and 1). The individualyi's for each input are the

relative prices, in that they are the teacher's willingnessto pay for an additionaldollar of

8 This is not referring to the direct effect teacher morale or satisfactionor compensation
might have on output, as this is already embeddedinto the productionfunction (so far have
said nothing about the structure of the productionfunction).

11
spendingon input i relative to their willingnessto pay for a dollar of salary and hence are pure

numbers. The "professionalism"parameter, 8, also lies between0 and 1.

Now the optimizationproblem in allocatingspendingto raise this weightedaverage of

teacher utility and test scores is:

Maximize [ (I-a) + a*8 ]*fs(X) + a*(l-6) *U(y'X)

s.t. p'X = B

While this model is in many ways a modest generalizationof the previousmodel, it has very

different predictionsabout the allocationof expenditures.In particular, the ratios of the

marginal educationaloutput per dollar of inputwill not be equalizedacross inputs. Instead of

implyingthe differencein marginal utility per dollar of inputs will be zero, as in the simple

optimizingmodel, the first order conditionsof this model imply:

J, I_ -s= a(l-8) * U* [j - '] (4)

Pi pj (l-a) + ab pi pi

That is, as long as the weight given to teacher utility is not exactly zero (a >-o)and the degree

of professionalismof teachers is not sufficientlyhigh that they are completelyselfless (6 < 1)

then marginal productsper dollar will not be equalized. The more directly an input enters

teacher utility (a higher y1) the lower the marginalproduct per dollar of that input in producing

educationwill be, relativeto anotherinput at the optimum.

12
 The intuitionis clear: sincethe chooser of inputs cares directly about teacher utility this

will lead to a higher level of spendingon inputs that teachers care about and because marginal

products are declining this higher level of utilizationwill lead to a lower marginalproduct per

dollar of that input. Conversely,those inputs that do not enter directly into teacher's utility

will have higher marginal productper dollar because their level of use will be lower than

under pure optimizing. In this model, the marginal productper dollar of inputsthat teachers

value directly (e.g. wages) will be smallerthan the marginal productper dollar of inputs which

teachers value indirectly(e.g. smaller class sizes, better physical facilities)which, in turn, will

be smaller than those that teachers value only because of their effect on achievement(e.g.

books).

Figure 1: Score versus other objective maximizing,

implicationsfior marginal products per dollar of inputs
Books (5) E U-U

E R'

. ..... .+. .

MP/$ __ ers

APAS~~~~~~~S

MP/S

13
 Figure 1 illustrates the case with only two hypotheticalinputs, call them "books"and

"wages."The educationaloutput optimizingchoicewould be to choose point A, where the

educationaloutput isoquant9 , whose slope is the relativemarginal product of books to teachers,

is tangent to the budget line, whose slope is the relative price of books to teachers. At this

point the conditionsfor an (interior)maximumare reached.

Adding teacher's utility directlyto the chooser's objectivesimplies that the isoquantsof

this new objectivefunction are steeperthan those of the educationaloutput only isoquant. This

implies the new equilibriumfor a given budget will involvemore teacher and less book

spending(point B). This higher level of spendingreducesthe marginal productper dollar of

teachers (illustratedin the southeastquadrant)and increasesthe marginalproduct per dollar of

books (illustratedin the northwestquadrant), which were equal when the objectivefunction

includedonly achievement. When teacher's utility is added to the objectivefunction,

relativelyless is spent on "books"and relativelymore is spent on "wages"so that the marginal

productper dollar of "books"is high relative to the marginal product per dollar of "wages."

Before moving to the evidence, let us make two points. First, our alternativemodel

is not derived from first principles. At this stagewe do not propose a particularreason why

teacher utility is present in the objectivefunction: it could be the result of patronage

maximizationof politicians, it could be the result of budget maximizingbureacrats.

Therefore "a" is our alternativemodel does not necessarilyrepresent"teacherpower"or the

benefits to individualteachers, but rather representsa possible outcomefrom a broad class of

I The combinationsof books and teachers that produceconstantamountsof educational

output.
14
models from which could this weight on teacher inputs could be be derived. We return to this

point in Section III below when we discuss policy.

In particular, we are not arguing that teachers are individually overpaid, a point we

return to in the final section'". Nor are we arguing "too much" is spent on education as we do

not model the determination of the overall budget for education, which could be low. In many

cases spending on teachers (or the budget overall) is "too low" in any absolute sense, even if

teacher spending is "too high" relative to the productivity of other inputs.

IT)Our reading of the evidence

How do the predictions of the two classes of models, output maximizing and teacher

influence, fare when faced with the evidence? There is an enormous literature examining the

relationship between the level and composition of educational spending and the output of the

educational process". We review three types of evidence in the literature: studies of cost

effectiveness, education production function estimates, and direct evidence from differences in

10 Several recent papers have examined whether teachers are "overpaid" by comparing
wages or incomes of teachers either with cross-national norms (Cox-Edwards, 1989, Carnoy
and Welmond, 1996) or with wages of other individuals, controlling for individual
characteristics, like age and education (e.g Psacharopoulos, 1987). To see why this literature
is distinct, imagine that receiving a teaching position was like a sinecure, for which the teacher
received a fixed annual payment completely independent of performance, and imagine that
therefore teachers did no teaching at all. In this hypothetical case the "wages" of teachers
could be arbitrarily low and yet the ratio of marginal product of teacher to non-teacher
expenditures still be quite high.

11 Much of this literature relevant to developing countries has been done at, or for, the
World Bank (Lockheed and Hanushek, 1988, Hanushek, 1995, Harbison and Hanushek, 1992,
Glewwe, 1996, Hanushek and Lavy, 1994, Khandker, Lavy, and Filmer, 1994, Tan, Lane and
Coustere, 1996, World Bank, 1995).

15
parental control within educational systems. Together this evidence overwhelmingly rejects all

three variants of the educational output optimizing models (simple, uncertainty, and multiple

output) in favor of a model which incorporates teacher utility into decision making. To

preview the results, the failure of the equalization of marginal product per dollar rejects simple

optimizing. The systematic pattern of that rejection across inputs: that educator related inputs

tend to be overused relative to non-teaching outputs, rejects the uncertainty (and we believe,

multiple output) models. The comparisons between public and private schools, or schools with

more or iess parental control, or comparisons of outcomes with different teacher unions,

definitively reject all three educational output optimizing models.

A) Fmpirical estimates of the cost effectiveness of various inputs

The key hypothesis to test the simple optimizing versus our model is whether the

marginal products per dollar of all educational inputs are equalized. However, studies only

rarely go on from estimating the marginal products in physical terms (e.g. the effect of class

size on test scores) to calculating the educational gain per dollar spent, typically called "cost

effectiveness", which is the best guess at the marginal product per dollar of spending of

different inputs at the observed allocations12

Table 1 reports the cost effectiveness estimates derived from a large scale evaluation of

an education project in Northeast Brazil (Harbison and Hanushek, 1992). These estimates line

up exactly as we would have expected if there is a substantial amount of teacher influence.

12 Unfortunately, it is impossible to recover comparisons of the marginal versus average

distinction from the existing empirical literature.

16
The cost effectiveness of teacher salaries (normalized to 1) is by far the lowest. Material

inputs which provide amenities to the school and teachers, such as teacher tables, toilets,

bookcases, have a cost effectiveness on average 7.7 times larger than teacher salaries.

Instructional materials, which provide benefits to teachers only insofar as they increase scores,

have cost effectiveness ratios between 17 and 34 times as large as the impact of additional

spending on teacher salary increases. The prediction of the simple optimizing model, that cost

effectiveness is equalized, is wrong by at least an order of magnitude.

Table 1: Ratioof test scoregainper dollarin Portugueseand Mathematicsfor variousinputs

relativeto teachersalary(= 1), average estimatesfrom Northeast Brazil
Second grade (Average Fourth grade (Average
Grand average 1981,83,85) 1983,85)
(years, subjects, 1981,83_85_19838
,5i
grades) PortugueseI Mathematics Portuguese I Mathematics
Material inputs
______ Textbook usage 17.7 33.9 22.7 14.5 0.0
Writing materials 34.9 11.8 13.8 58.8 55.3
Software* 19.4 19.4 13.4 24.5 20.3
Infrastructure inputs
lHardware* [ 7.7 1 3.4 ] 3.5 J 16.0 | 8.1
Alternative teacher education strategies
Curso de Qualificacao 5.0 1.2 2.5 5.0 11.3
Logos 8.3 8.3 6.8 13.5 4.6
4 yearsprimaryschool 6.7 8.5 13.2 0.0 5.3
13years secondary school 1.9 2.5 3.9 0.0 1.5
Teacher salary
Teacher salary 1.0 1.0 1.0 1.0 1.0
* Hardware: water, bookcase, teacher table, pupil chair, pupil desk, two classrooms, large room, director's room,
kitchen, toilet, store cupboard Software: writing material, chalk, notebook, pencil, eraser, crayons, textbook usage
Source: Derived from Harbison and Hanushek (1992), Table 6-2

Table 2 provides similar estimates from a large scale study of student achievement in

eight states in India (World Bank, 1996a). The cost effectiveness of increasing teacher salaries

is again normalized to 1. The cost effectiveness of spending on improving physical facilities is

17
higher than that of teacher salaries (1.2 times higher), however that for increasing just

classroom size is between 1.7 and 4 times higher. The cost effectiveness of spending on

instructional inputs is between 4 and 14 times higher than that of increasing teacher salaries.

Again the actual ratio between the marginal product per dollar of salary inputs and

instructional materials is different from the level predicted by optimizing model by more than

an order of magnitude, 14 to 1.

Table 2: Test scoregain per rupeefor variousinputsrelativeto teachersalary (=1), average

acrosslow-literacydistrictsin eightstatesof India, 1993
Instructionalmaterials
_Completepackageof instructionalmaterialsand aids 14.0
Coverageunder OperationBlackboard,equipmentonly 4.0
Physicalfacilities
I - _
Full packageof facilities 1.2
One additionalsquare foot per student
Costbased on schoolconstructionin UttarPradesh 4.3
,Costbased on DPEP average 1.7
TeacherQuality
fIncreasingaverageteachersalaryby Rs. 100per monthper school 1.0
Opportunity to learn
Reducingthe pupilteacherratio by one 0.1
Addingone additionalschoolday per academicyear 1.0
Addingone additionalteachinghour per academicyear 0.6
Addingone additionalhour of languageinstructionper academicweek 29.0
Source:WorldBank(1996a)AnnexF

What is somewhat puzzling is that class size reductions are even less effective than

teacher salaries. However both of these results are consistent with recent estimates by

Kingdon (1996) using sample survey data for students from 30 schools in urban Uttar Pradesh,

who finds that if the cost effectiveness of teacher salary is normalized to 1, the cost

18
effectivenessof class size reductionsis .029 but the cost effectivenessof increasingschool

physical resources is 3.2's.

R) Fducationproduction function.estimates

Do these few cost effectivenessstudiesrepresentthe typical case across a variety of

conditions? While there are few studiesthat calculatecost effectivenessfor different types of

inputs, there are numerousstudies whichrelate student achievementto school characteristics,

such as inputs, while controllingfor student's backgroundcharacteristics(e.g. parental

income, education)and there have been severalprominent reviews of this literature. These

reviews face enormousdifficultiesin summarizingthe empiricalresults of the different studies

as the estimatedcoefficients,which are reported in physicalquantityunits, (e.g. test scores

gain per square foot) are not directly comparableeither across inputs or across studies.

Therefore the reviews summarizeonly whether the effect was estimatedto be positive or

negative and whether it was statisticallysignificant(althoughsome do attemptto report "effect

sizes" which, at least normalizesthe test scores to standarddeviation, Lockheedand Haunshek

1988).

Confirmationpercentageevidence. Holdingthese problemsfirmly in mind, there are

two ways we can bring the enormouseducationalproductionfunction literatureto bear on our

competingpositive models. First, we can comparethe "confirmationpercentage"of various

inputs, that is the frequencywith whichthe variable is found to be statisticallysignificantof

13Since this study did not report cost data for school resources, we used data from World
Bank (1996a) to calculatethese ratios.

19
the expected sign sorted by our conjecturesas to which inputs are of most and which of least
1'
direct importanceto teachers 5. In the most recent of these compendia,Fuller and Clarke

(1994)summarizedin Table 3, there is a markedlyhigher confirmationratio for the inputs,

like facilities and instrumentalmaterials, which are less likelyto appeardirectly in teacher's

utility (two other reviews, Harbisonand Hanushek, 1992 and Velez, Schiefelbeinand

Valenzuela, 1993 report similar results and are includedas appendix1).

In Table 3 "teacher's salary" has a confirmationrate of 36 percent for primary and 18

percent for secondaryschools, the confirmationrates of teacher-pupilratio are 35 and 9

percent respectively. In contrast, the presence of a schoollibrary has a confirmationrate of 89

percent and the availabilityof textbooksa confirmationrate of 73 percent for primary and 54

percent for secondaryschools. Interestingly,a review of 43 studies(appendixtable A.2)

found that only 4 of those found a significantand positive relationshipbetween "teacher

satisfaction"and student achievement.

14 We include only inputs reported in the surveys of the literature that were subjectto 10
or more studies.
" This ranking is problematicas the interpretationof a coefficientdepends critically the
other variables includedin the regression. For instance, some regressions include
"instructionaltime," if teacher salariesare includedin the sameregression then more time for
the same salary would be a real wage reductionwhich teachers should opposeso that the
marginalproduct shouldbe very high. If teacher salariesare not includedthen its sign is
ambiguous. Similarly,the coefficientson "teachertraining"or "teachereducation"all depend
on what else is includedin the regression.
20
Table3: Confirmationpercentagesof variouseducationalinputssortedby direct importance
to teacher utility.
1 Positiveand Confirmation
| Number of studies significant relation Percentage
Primary Schools: ._.
Teacher's salarylevel 11 4 36.4
Schoolteacherpupilratio 26 9 34.6
Teacher's years of schooling 18 9 50.0
Teacher's experience 23 13 56.5
Class instructionaltime 17 15 88.2
Class frequencyof homework 11 9 81.8
Schoollibrary 18 16 88.9
Schooltextbooks 26 19 73.1
Secondary schools
Teacher's salary level 11 2 18.2
Schoolteacherpupilratio 22 2 9.1
Teacher's experience 12 1 8.3
Class instructionaltime 16 12 75.0
Schooltextbooks 13 7 53.8
,Source:Fuller and Clarke (1994)

If marginal product per dollar were equalized, there is no compelling reason to believe

that the confirmation ratios would not have been roughly equal across inputs. While this

evidence is far from airtight, as it is possible the differences in precision could have affected

the pattern of statistical significance, the most straightforward way to read this evidence is that

studies that use non-experimental data systematically evaluate the marginal product of inputs at

points that are not education output maximizing. The results suggest that at the input spending

allocations typically observed in non-experimental data in which these allocations are the result

of choice, the marginal product of inputs is lower for those inputs more highly valued by

teachers and hence they are more likely to be statistically insignificant.

21
 The second way these production functionstudies could be brought to bear on the

competinghypothesisis to calculateestimatesof the marginalproduct per dollar from the

results. Unfortunately,after scouringthis literaturewe found very few studiesthat report the

necessary information,principallybecausethey lack data on the relativecosts of various

inputs. Even among those that do report some estimatesof cost effectiveness,standard

practice is to calculatecost effectivenessonly for those estimatesthat happen to be statistically

significant(and in the right direction). Table 4 reports the educationalproduction function

estimatesby Tan, Lane, and Coustemane(1996)for which they calculatecost effectiveness

only for those few inputs, particularlyworkbooksand furniture, that were statistically

significant. They do not however comparecost effectivenessper dollar with other inputs, such

as reductionsin class size. Using their estimatesand informationabout teacher salaries and

class sizes from other sourceswe calculatethat at the estimatesthey report, providing

workbookswas 800 to 1600 times, and providing furniture 700 to 1200times, more cost

effectivethan reducing class sizes. One might object we are using a statisticallyinsignificant,

and hence potentiallyimprecise,estimate on class size, but even if we add two standard

deviationsto the point estimatefor class size (that is increase it to the upper range of a 95

percent confidenceinterval)the impact of workbooksor furniture was 100 times larger than of

reducing class size. This is still two orders of magnitudelarger than the ratio predicted by an

optimizingmodel.

22
 Table 4: Calculating relative cost effectivenessof teacher to non-teacher inputs
whiletakingprecisionof estimationinto account.
Input: Subject: Ratioof cost effectivenessof inputsto increasingclass
size:
At pointestimatesof all Addingtwo std. dev. to class
variables size pointestimate
Math 689 90
Furniture
Filipino 1243 113
Math 842 110
Workbooks
Filipino 1592 145

Notes: In order to calculatethe cost of decreasingclass size, we use the fact that average
teachersalary is 2.5 timesGNP per capita(WorldBank, 1996b)and assumethat each
teacherteachesan average of two classes,and that the averageclass size is 40.19 as
reportedin Tan and others(1996).

Since most investigators begin with a presumption that the inputs into education are

reasonably well known, presumably the key critical question that estimation of a production

function could help resolve is whether reallocating inputs given a fixed budget could improve

performance. Reporting only estimates of the production 'unction with no estimates of costs is

not even relevant to that question. The distressingly common practice of reporting the

production function estimates of known educational inputs in quantity units (e.g. class size)

text books, physical facilities and their statistical significance without comparative information

on costs is nearly devoid of policy interest"6 .

16 By stipulating known inputs we distinguish studies of pedagogical innovations such as

radio instruction, computer assisted learning, alternative teaching strategies, etc., where the
question of zero marginal product over all ranges is actually a useful null hypothesis.

23
 This also raises a problem for the "meta-analysis"approachto creating statistical

significance,in that it ignores the actual underlyingpolicy questionand the asymmetryin what

the two sides of the "moneymatters"debate are asserting. That is, if the impact of teacher

inputs (e.g. salaries, class size) is not demonstrablydifferent from zero then it is also not

optimal, in the sense of equalizedmarginal products. However, showingonly that teacher

inputs, or budgetaryinputs generally,have some impact (which can be done with meta-

analysisHedges, Laine and Greenwald, 1994) does not addressthe questionof whether those

levels of inputs are optimalor whether reallocationsin expenditurescould increase output.

Moreover, calculating cost effectiveness for only those estimates that are statistically

7.
significantconfuses the magnitudewith the precisionof the estimate"

One intriguingaspect of using a normativeoptimizingproductionfunction model as a

positive descriptivemodel of behavior in an empiricalstudy is that these assumptionsself-

referentiallypredict the impact of the study itself. If educationalpolicy makers are assumedto

be attemptingto optimize, then choosingtoo much teacher expenditurerelative to spendingon

physical facility, equipmentor books could only have been becauseof a mistakenbelief about

the "true"production function. But then the behavioralmodel predicts that the study itself (if

believed) shouldcause a reallocationof resources towardsthe more productive resourcesas the

17 One huge problem with reportingonly signs and statisticalsignificanceconcerns

statisticalpower. Failing to reject that a particularcoefficientis zero could result either
becausethe estimatedimpact was small or becausethe impact was large, but very imprecisely
estimated. If the effect of some inputsis estimatedwith greater precisionthen these will tend
to be more "significant"even if they are empiricallysmaller. Moreover, there is no necessary
connectionbetween the precisionof the estimatesin quantityunits and cost per unit so one
may "fail to reject" the test of zero impact for some inputswhich have extremely high cost
effectivenesswhile finding statistically"significant"other inputs with low cost effectiveness.
24
new informationfixes the previous mistake. Has this (implicit)predictionof output

maximizingmodels been confirmed?

As we presentedin the sectionabove, the weight of internationalevidenceof too little

spendingon some inputs has always been impressive,and has been accumulatingover time.

Fuller and Clarke, in their 1994 review, point out that while there were 37 new studies since

the review of the evidence in 1986(Fuller, 1986), the new studiesmostly confirmedprevious

patterns, particularlythe relativelygreater importanceof books and instructionalmaterialsthan

class size and teacher inputs (Fuller and Clarke 1994). However, while recent data are very

difficult to come by, the share of educationalexpendituresdevoted has, if anything, shifted

towards an even greater share of teacher compensation(althoughthis may be due to a fiscal

contraction.) We know of none, and conjectureit would be difficultto document a single

instance in which an empirical study, or even a series of studies, actually affectedthe

18 . In contrast, a model that explains the existing spending
distributionof expenditures

allocation as the result of a politicalprocess implies that studiesof the products of various

inputs may, but probably will not, influencespendingwhich will require changingthe

incentivesof decisionmakers (summarizedas "a" in our simpleset-up).

18 There raises another, borderline ironic, sub-textto the econometricproduction function

estimates. In order for the estimatesfrom non-experimentaldata to correctly identify an
underlyingproduction functionthere needs to be some mechanismthat causes differentchoices
of input mix other than shifts in the productionfunction itself. If differencesin input use
across the levels of the data (e.g. districts, schools, etc.) are due to differencesin teacher's
utility weight (a) in the objectivefunction across policy makers then this impliesthe empirical
estimatesare correctly identifyingthe productionfunction. However, while these makes the
estimatestechnicallycorrect it also makes them irrelevantfor policy.

25
 Caveatsabout the educationalproductionfunction literature. We should not overstate

our case as to the reliabilityof the educationalproductionfunction literature in supportingany

hypothesis. Many of the studies find nothingto be statisticallysignificantand often find

perverse patterns in the point estimates (for examplenegativesigns on inputs like teachers or

books). Moreover, even when the estimatesof the individualproduction functioncoefficients

are reasonable,school inputs typically have very small explanatorypower. There are several

additionaleconometricdifficultieswith the literatureand we shouldat least mention four:

9 , multi-collinearity,insufficientvariation in input use,
simplisticand differing specifications'

and different sensitivitiesamong inputs.

One point on the latter two concerns. Supposethat there were a number of potential

non-teachinginputs with high, but steeplydecliningmarginalproducts (like algebra books). A

perfectly random allocationof resources among thesenon-teachinginputs would produce a

pattern of some very large and some small estimatedmarginalproductswith the high

productivity of some of these factors due to the very low utilization. Different inputs might

have different amountsof variation in use20. This pattern suggeststhat there are inputs for

'9 The specificationsin this literatureuse quite simpleassumptionsabout the production

function, usually that output is linear or log-linearin inputs. In particular this rules out
interactiveeffects between inputswhich are potentiallyimportant.Also, the analysesreported
above may suffer from the fact that the specificationsare not identicalacross the various
results reported. Even so, World Bank (1996a) reports results from estimatingthe exact same
functionalform of an educationalproductionfunction in low literacy districts in eight Indian
states, for two different educationaloutcomes. The results clearly show that the significance
(and sign) of the effects of the inputs vary widely across the differentstates even for exactly
the same specification.
20 Using the results of World Bank (1996a)we perform a crude regression of the
significanceof the parameterestimate on the mean and standarddeviation of the input. The
26
which the marginal product is very high at low levels but declines very rapidly. In this case

one would expect to see a very high marginal productfor that input, but also observe that the

input was rarely in range of low use, and hence the empiricalfinding is of limited usefulness.

For instance, Glewwe(1996) conductsa study of the determinantsof school quality in Ghana

using a large scale data set and the only statisticallysignificantschoollevel effects on math and

reading test scores are from the fraction of classroomsthat have blackboards,and the fraction

of classroomsthat cannotbe used when it rains. However, even in Ghana, 90 percent of

schoolshave blackboardsand only 15 percent of middle schools have leaking classrooms.

) Direct evidence

The 10 to 100 fold divergencesin marginalproduct per dollar across inputs, and that

these are in a consistentpattern across inputs, rule out both the simpleand uncertainty

optimizingmodels. However, one could still return to the multiple output model and

conjecturethat the observedpattern of marginalproducts in producingscores correspondsto

the inverse pattern in the marginalproducts in producingsome other output. In this section we

first say why we think this objectionis unfounded,and then show additionalevidencethat

bears directly on the differencebetweenthe multiple schoolingoutput and our model, and

which leans in favor of a positive model with teacher influence.

results suggestthat for score on readingtest the degreeof significanceof the effect of an input
is significantlynegativelyrelated to the mean value of the input. For the score on the math
test, the estimatedmagnitudeof the effect is significantlypositivelyrelated to its standard
deviation.

27
 There are three reasonsthe multipleoutput model is theoreticallyand empirically

inadequate. First, it appealsto variablesthat are either unobservedor unobservable, which

makes the model non-falsifiable. Someonewith an interest in rejecting a positive model of

expenditureswith teacher influencecould always assert that the patterns of the marginal

product of inputs for the unobservedcomponentof educationaloutput (e.g. citizenship)are

exactly what they would have to be in order to rationalizethe observedoutcomes. Because the

output is unobservablethey could make this assertionwithout fear of contradiction(or

confirmation). Second, related to the first, there is little or no empiricalevidenceof the effect
21 . Third, it is hard to
of various educationalinputson anything other than achievement

understandintuitivelyhow a multiple output model could explainthe existing empirical

patterns, for instance of teacher salary versus class size or physical facilitiesversus

instructionalmaterials. In order for an appealto multiple outputs to be satisfying,one would

have to explain why is it that the unobservableoutput of educationrequires enormouslyhigher

teacher salaries, more teachers, but less physicalfacilitiesand less instructionalmaterials than

the observableoutput.

Parental versus educatorpower: Local and parental contributions,private schools and

unions. Fortunately, there is a source of direct evidencewhich is able to distinguishthe

21 Card and Krueger in variouspapers (e.g. Card and Krueger, 1996) have shown that
budgets are related to subsequentwages of workers, but this evidence is not entirely relevant,
for two reasons. First, their studiesare of aggregatebudgets and do not address the question
of relative marginalproducts of various inputs. Second, their studies are consistentwith
wages being a better measure of achievementthan multiplechoice tests without invoking any
additionalassumptionsthat somethingbesides achievement(e.g. "workerdocility")being
produced by schooling.
28
multiple output from the teacher influencemodels. As pointed out above, if the chooser is

attemptingto optimizethen new informationabout the productionfunction shouldchange

inputs and outcomes. In this sectionwe argue that the converse is also true: if the optimizing

model were really correct then one shouldnot see patterns of input use and outcomesrespond

to different degreesof incentives. Greater local financingor control of schools, differing

degrees of competition, or differing amountsof union power should not affect technical

efficiency. But the evidencesuggeststhat these factors do have an important effect both on the

allocationof expendituresand the efficacy of outcomes. The following sectiondiscussesthree

sourcesof evidencerelating to various sourcesof differencesin parental power: the degree of

local control, teacher unions, and private schools.

Local and parental contributions. A first source of evidence is the impact of direct

parental participationand contributions. Modest amountsof direct contributionsof parents

shouldhave large effects on performanceonly to the extent that some inputs(infrastructure,

equipment, instructionalmaterials)are so dramaticallyunder-fundedby the publicly allocated

budget that their marginal productsper dollar are very high. If marginal productswere

equalized(even according to an optimizingmodel with multiple outputs)then the relatively

small contributionsshouldonly have a proportionatelysmall effect. Evidence of substantial

impact by parent's groups, or of local control, or of the proportion of resourcesfrom local

sources is itself a sign of a failure to maximizeoutputs in the overall system of expenditure

allocation.

Jimenez and Paqueo (1996)using data from the Philippinesfind that schoolswith a

small componentof local financing(under 5 percent) are incrediblyless productive than

29
schools with even a small share of public financing: their achievement score per dollar is only

a third as high. More importantly, the cost savings that produce this greater cost effectiveness

come disproportionately from personnel whose cost per student is 52 percent lower, with much

smaller cost savings for other inputs (Table 5).

Table 5: Relativecost effectivenessand expenditurescompositionof locallyversus

non-locallyfinancedschools
Proportionof fundsfrom local sources:
<5% > 25% Percentagedifference
Overallscore 42.46 48.25 13.6%
Total expenditures 675 265 -60.7%
Achievementscoreper 0.06 0.18 189.1%
peso
Costper student(Philippiespesos) .
Personnel 469 226 -51.8%
Maintenanceand 42 35 -16.5%
operating _
Textbooks 1 7 5 -26.6%
Source:Adaptedfrom Jimenezand Paqueo(1996),table 1.

Similarly, James, King and Suryadi (1996) find that even controlling for whether

schools are public or private, a greater share of funds that are locally raised compared to

centrally allocated increases significantly educational output (in their model, decreases cost for

a given output)2 2 .

Many countries have adopted locally run community schools as a mechanism to

accommodate the demand for schooling in remote and rural areas that are not reached by the

22 Both of these papers use econometric estimation of the dual, that is, cost per student
controlling for quality, rather than estimate a production function. However, their results on
local financing indicate that the primal problem is not maximization of output subject to a
budget constraint, but rather some more complicated objective function involving teacher
utility of the type we explore here.

30
"official"school system. One common featureof these schools is that the teachers are hired by

the local communityand are not educationministry employeesand are not subjectto the usual

qualificationrequirements. While there is little direct evaluationof these schoolsthat can

comparecosts and outcomes,the existingevidencesuggeststhat communitymanagedschools

user fewer "teacherwage"inputs and achieveessentiallythe same or better academicresults.

Results on local financingand the experiencewith communityschoolsare consistent

with more centrally controlledresourcesbeing allocatedby an optimizerwith a high concern

for teacher welfare (high a) principallyto teacher inputs, while locally raised funds being

subject to a greater degree of parentalcontrol and hence high concern for educationaloutput

(low a) and are allocatedprincipallyto non-wageinputswith high marginal product.

Private schools. The evidencefrom five developingcountriesmarshaledby Jimenez

and Lockheed(1995) shows that, even controllingfor selectioneffects, private schools are

significantlymore cost effective than public schools. This fact alone is inconsistentwith the

sirnple or uncertainty optimizingmodel of the allocationof the public budget. However, it is

possible that the improvementin efficiencyis due to pure X-inefficiencyof public schools, that

is public and private schoolsdo not differ in the allocationof inputsbut simply that private

schoolsare uniformly more productive for all inputs. An alternativeexplanation,consistent

with a model of teacher influence,is that private schools, if they are more subjectto

competitionfor enrollments,are more directlycontrolledby parents. By being more subject to

parental pressure and less susceptibleto teacher power the managersof private schools (or

private school systems)will have a lower "a'than public school system managersand these

differencesin parental control shouldproduceboth higher effectivenessof the budget overall

31
and also different ratios of inputs. Importantly,since evidencefrom private schools is based

on parental willingnessto pay for schoolingit does not depend on test scores as the measure,

as it incorporatesparent's concerns about the all schoolingoutputs. If the observeddifference

in marginal productsper dollar of inputs were the result of optimizingover multiple outputs

and public and private schoolswere optimizingover the same set of outputs, then one should

not observe systematicdifferencesacross the marginalproducts of various inputs between

private and public schools.

Fortunatelythere is a recent study that providesalmostexactly this test. Alderman,

Orazem and Patemo (1996)examine how the characteristicsof schools (like instructional

expenditureper student and class sizes) affect parentaldecisionsbetween private and public

schoolsin Lahore, Pakistan, an urban area where 58 percent of studentsare enrolled in private

schoolseven though private school fees are 5 times higher. They find, controlling for class

sizes and instructionalexpenditures,that achievementscores were 60 percent higher in private

schools.

Since schoollevel instructionalexpenditurerepresentsalmostentirely teacher salaries

we can comparehow much parents are willingto pay to increase salariesversus decreaseclass

sizes. As shown in table 6, parental willingnessto pay to increase salaries in the private sector

was almost six times larger than in the public sector, suggestingthat the marginalproduct of

additionalteacher wages in terms of all parental valuedoutputs (not just scores) in the public

sector was already quite low. Conversely,class sizes were so high in the public sector that

parents were willing to pay substantialamountsto reduce them, and were substantiallymore

willingto pay for class size reductionsthan wage increases,the oppositeof the private sector.

32
 Table 6: Parental willingness to pay for teacher salary increases versus class size reductions
in private and public schools in Pakistan.

Private school Public School Ratio Private to

public

Expenditures per teacher (rupees per month) 7711 8406 .92

Parental willingness to pay to increase 40.4 7.05 5.7

instructional expenditure per pupil (a proxy for
teacher salaries of Rp 200)

Average class size 25.2 42.5 .59

Parental willingness to pay to decrease class size -35.7 7.10

by 10 students

Ratio of willingness to pay an additional rupee to .47

teacher salaries versus class size reductions

Notes: Adapted from tables 2 and 5, using willingness to pay of parents with monthly household income of Rp.
3000 (Alderman, Ozarem, and Patemo, 1996).

Unions. Caroline Minter-Hoxby has two recent pieces of research, which although

they are on the US and not developing countries, are relevant to the issue at hand23 . In one

(1994) she shows that the larger the number of school districts within a given metropolitan

area the better the performance of the schools. She argues this is evidence that greater

competition among public school districts substitutes for school choice and increases

performance. Another paper (1996) shows that even after controlling for the endogeneity of

unionization, school districts that are unionized are less effective than the non-union school

districts. She shows that in districts with unions, spending on schools is higher but a larger

proportion goes to teachers.

23 Since we believe that there are qualitative differences between the US case and that in
developing countries, we are reluctant to use any evidence at all from the US, as this raises a
whole host of US specific issues. However, the evidence provided here is too unique and too
directly related to the question at hand to pass up.

33
ITT)Implications of a p2ositivetheory for educational policy

We have shown that the educational output optimizing model of expenditure allocation,

in all its variants is inconsistent with the evidence and that a simple model in which teacher

utility receives direct concern in expenditure choices is consistent with the stylized facts.

Having a positive model of educational spending is important for the analysis of policy

options. As mentioned in the introduction, there are two kinds of educational policies

currently proposed: more of the same (higher enrollments, higher expenditures, better teacher

training, etc.) and fundamental reform of incentives (decentralization, community

involvement, school choice, etc.). Guidance on the choice between these requires modeling

the underlying public sector decision and control mechanisms as fundamental reforms are

about changing the incentives within the sector.

A) More hudget versus reform

As mentioned above, one of the puzzles in the literature on educational production

functions is that it is often difficult to demonstrate a positive impact of increased spending on

educational outcomes24 . The literature is criticized precisely because the results seem so

implausible to educators and educated alike: of course "money matters" and on some level

24 The two best arguments against this are the meta-analysis of studies in the US (Hedges,
Laine and Greenwald, 1994) and the studies of the impact on subsequent wages of budgetary
resources while in school (Card and Krueger, 1996), also done exclusively in the US. Both of
these are reasonably convincing that there is some, but small, connection between expenditures
and outcomes, which of course under a positive maximizing model must have been the case.
But neither of these methods speak to the question of whether a different budgetary allocation
could have had a larger impact.

34
everyoneknowsthat2'. But the implicationof our positivemodel is that while "money

matters" to educationaloutcomes, money also matters to those who receive it as incomeand

that "mattering"will have implicationsfor publiclydeterminedoutcomes,like the allocationof

expenditures.

Budgets and educationaloutcomeswhen objectivesdiffer. If non-experimentaldata are

taken from jurisdictions (or time periods within the samejurisdiction) that differ in either the

degree of educationaloutput concern (1-a) or in the degree of professionalism(6) of the

teachers then equal budgets could produce very unequal outcomesdue to the allocationacross

inputs". For any given level of a, higher budgets lead to better outcomes(the sense in which

money matters). But a higher a implies worse outcomesfor any given budget. Any

estimationof the relationshipbetween expendituresand budgets from non-experimentaldata

that differ in a whichdo not control for these differencescan produceany relationshipat all:

positive, zero, or negative. For instance,Hanushekand Kim (1996) estimatethe relationship

between the internationallycomparabletest scores of achievementin math and sciencederived

from the various IEA and IEAP studiesand expenditures. They find that both public

expenditureper student and the ratio of total educationalexpenditureto GDP are significantly

25 There has been a vociferousdebate in the US around the question"does money matter?"
In this politicaldebate the rejoinder "the only ones who say resourcesdo not matter have their
children in schoolswith adequateresources" carries a good deal of common sense appeal.
2 6Differencesin the relative weight of teachers also happen over time within a given
jurisdiction as acrossjurisdictions. For instance, in Paraguayafter the end of a long period of
dictatorshipteacher wages more than tripled in a six year period, with an almost completelack
of complementaryreforms either in the school systemor even in the structure of teacher pay.
Giventhe total lack of objectivecomparabletesting it is impossibleto say for sure, but many
doubt this increase led to commensurateincreasesin student performance.

35
negativelyrelated to achievement. While this obviouslycannot representthe impact of the

relaxationof the budget constraint, if higher a valuesare associatedwith higher budgets then

the data across jurisdictionson budgets and outcomescould show a negative relationship,as in

figure 2 with a line fitted to hypotheticaloutcomesA, B and C, even though for any given a a

budget increase would improve scores.

PFigure 2: Budgets aznd educational outcomes

Outpu =0

0
~~~~~~~~L

Budget

Given that both budgets and their allocationmatter, what shouldbe the focus of

improvingschool performance? The answerthat wil! be guaranteedvocal support is "increase

budgets"as this generatessupportamong parents, the generalpublic who have an interest in

promotingbetter education,and teachers (for both professionaland self-interestedreasons).

27 Differencesin misallocationrelativeto the optimumis only one possibleexplanationof

the empiricallysmall impactsof budgetson outcomes. The other is that educatorsare
systematicallyignorant of the true pedagogicalfunction, and ideologicalblinders, not self-
interest prevents them from acknowledgingthe truth. This is essentiallythe controversial
argumentE.D. Hirsch (1996)makes about schoolingin the US. In this case more resources
do not produce greater output becauseof ignoranceabout the production function.
36
However, if the existingallocationof inputs is not optimal, schoolperformancecan also be

improvedby a reallocationof expenditureswith no increasesin the overall budget. These

proposals will tend to split the above coalition and pit educatorsagainst all others. Which type

of reform will be the most effective if implemented? The answeris, not surprisingly(and

even reassuringly),it all depends. If the budget is high and a is high then fundamental

reforms are more pressing. If on the other hand the budget is low and a is low then budgetary

reform shouldreceive priority.

To say more, we can make specific(and very limiting) assumptionsabout the

functionalforms of the productionfunction and teacher utility (Cobb-Douglas)and assume no

teacher professionalism. Under these assumptionswe can solve explicitlyfor the relationship

between scores, budgets and a. In this case, the score improvementfrom budget increases

approachesinfinity as the budget tends to zero and approacheszero as the budget tends to

Figure 3: Impact of budget reform versus changes in a

l 8~~S/8u, BS/8B

! \ - -- ------ - 1

aX=1 a- OL 1 0 B B Budget

37
infinity for any given a. The incrementalimpact of changesin a on scores approacheszero as

a goes to zero and approachesinfinityas it approachesone28. As can be seen in figure 3, this

situationimplies that for any given level of the budget, B. there is a critical level, a*, such

that for all levels of a above a* the incrementto changinga will have a greater impact than

changingthe budget. Similarly,for any level of teacher power, a., there is some level of the

budget low enough (B*) such that increasingthe budget will have more impact on scores than

changingteacher power.

B) Three possiblemodels hehind the model

The model we have specifiedis ad hoc, in that it is not derived from underlying

behaviorby actors, and hence is more of a descriptionof a class of models that might be

derived from different structuralassumptions. That is, we have not articulateda complete

model which specifieswhich person or entity controlsthe allocationof spending(a school

board? a legislature?the ministry of education?)nor why exactly that person or entity cares

directlyabout teacher welfare. For many of our conclusionsthe exact model is not important.

However, to move to the predictionsabout outcomesof more specific reforms one needs to

specify a more completemodel. There are three prototypemodels:principal-agent,teacher

power, andpatronage, each of which has differentimplicationsfor policy.

28Both of these results are illustrativeonly as they follow quite mechanicallyfrom the
Cobb-Douglasassumptions,which implies that each input is 'essential" in the sense its
marginal product goes to infinityas the level of input approacheszero.

38
 Principal-agent. In this model the decisionmaker can be either the parents themselves

or a manager that faithfullyrepresentsparent interests. The source of teacher weight in the

objectivefunction is superior knowledgeby teachersabout the productionfunction. In this

case, teachers will systematicallymisrepresentthe productionfunction so as to lead the

chooser of budgets to choose greater spendingon those inputs that teachers prefer. In this

model, empirical studies actuallymight have some impactby revealingthe true production

function. This particularmodel predicts a systematictendencyof educatorsto resist

quantitativeevaluationof their output, as this allows checkingthe reported production function

against the actual.

Teacherpower. The secondpossibilityis that teachers as a group are powerful enough

to affect the allocationof educationexpenditures. In this case, there is a third party (e.g.

minister of education)or institution(e.g. legislatureor schoolboard) that controls budgetary

allocationsand has to choosebetweenpleasing a concentratedgroup of educatorsand a diffuse

group of parents. Given that on issues like teacher wages educatorshave a very clear and

direct interest, they may be more successfulat organizingto influencepublic decisions than

are parents. In this case, the problem is not that parents are systematicallyunder informed

about the productionfunction, but that parents have greater difficulty overcomingthe free

rider problem inherent in collectiveaction than do teachers (Olson, 1965).

In our model greater teacher professionalismhelps output. However, the mechanisms

that foster greater teacher professionalismare preciselythose that tend to create greater teacher

power by making cooperationin lobbyingeasier. A commonrecommendationof education

39
professionalsis to get teachers to work together, to share experience, give support, etc.
2 9.
However, teachers are no differentthan any other group and AdamSmith's adage applies

Patronage. Another possible model is that teachers are not particularlypowerfulbut

the chooser of expendituresis powerful. Supposethat the Minister of Educationcan allocate

all jobs and eachjob creates a favor. In this case the chooser would want teacher salaries to be

relativelylow (but a slightpremium so that the job is a "favor")but would want to maximize

the employmentof teachers. In this case teachers would be poorly paid individuallybut there

would far too many teachers. This might explain those cases in which the marginal product of

teacher salary was greater than that of class size as the total wage bill to the chooser is more

importantthan the wage.

C) The analyticalbase for fundamental school reforms

A positive model of educationalexpenditureswill also provide guidanceto the actions

or reforms that are likely to improveoutcomes. In particular, there are three commonly

proposedactionsthat are unlikelyto lead to significantchangesin performance: more research

into the technicalpedagogicalprocessesbehind the productionfunction, more school choice

withouttrue competition,and greater parentalinvolvementwithout control or choice.

Ignorance or incentives? Even though, as in all fields that involvehuman behavior,

there are enormous areas of ignorance,the fundamentalproblem is typically not teacher or

29 "Peopleof the same trade seldom meet together, even for merriment and diversion,but
the conversationends in a conspiracyagainstthe public, or in some contrivanceto raise
prices.
40
technocrat ignorancethat could be resolvedby more research. Our positive model implies

several things about education research. First, sincesome types of research are inimicalto

furtheringcertain intereststhis implies that one shouldexpect there to be relativelylittle

research into cost effectivenessof variousinputs from educationalproductionfunctions. The

amount of ignoranceis endogenous,and sometimesit pays to be ignorant30 . Second, only well

disseminatedand widely understoodstudiesthat foment deep public dissatisfactionwith the

schoolswould be likely to changethe incentivesof the actors within the system and hence have

any influence on outcomes. Merely documentingthe differences,as has been done in many

times and many places, will typically have no effect.

Finally, an implicationsimilar to the lack of new studiesin influencingexpenditure

allocationsis that educationalinnovationsthat are labor savingwill be under adopted. That

is, when technologicaladvance shiftsthe productionfunctionsuch that more of some other

input and less of teachinginput is now optimal, one can expect to see resistance and see that

the adoptionrate is very slow, or occurs withoutany labor saving3". In almost complete

30 This point is not lost on legislatorsor policy makers. In Horn's (1995) terminologythe
"enactingcoalition"of interests have incentivesto prevent future legislatorsor policy makers
from undoing their agreement. In the US for instance, certain types of regulatory legislation
explicitly forbid the implementingagencyfrom consideringcosts. During certain periods
Departmentof Agricultureeconomistswere forbidden from doing any research on the
economic losses from existing agriculturalpolicies. A recent exampleis the Clinton
administration'srefusal to redo a study of the impact of welfarereform which had been
influentialin scuttlingearlier legislation(The WashintonPost, July 26, 1996).

31 Again, teachers are not alone in this as capital intensiveinnovationshave always

brought resistancefrom those with specifichuman capital. In fairness, labor intensive
innovationshave also met staunchresistance, such as the persistentoppositionto land reform
from large land owners in Latin America (Binswangeret al, 1993).

41
ignorance, we would predict very slow and patchy adoptionof innovationslike rural radio

based instruction,shown almosttwenty years ago to be extraordinarilycost effective

(Lockheedand Hnaushek, 1988), even when this technologyis appropriate. Even more

speculatively,we guess new technologieswill only make headway as an input in addition to

teacher inputs and hence will be adopted only when the new technologyis used as an output

(and budget increasing)device, and not for cost savings.

School choice with and withoutcompetition. Sinceteacher welfare increasesdirectly

with their weight in the decisionmaker's objectives,teachers as a group will rightly oppose

any reform efforts that would reducethat power. Changesthat provide more schoolchoice to

satisfy "tasteheterogeneity"but that do not create true supplycompetitionon input use will be

unlikely to changeinput expenditureoutcomessignificantly. This is clearly consistentwith

teacher's oppositionto private school choice and their lesser concern with choice entirely

within a controlledpublic sector.

Exceptionsto the widespreadpredominanceof public schoolsperhaps prove the rule.

In some school systems, such as those in the Netherlandsand Argentina, "private"schools are

subsidizedby direct governmentpaymentsand private schoolsaccount for a large fraction of

enrollment. However, these paymentsin Argentinaare structuredsuch that it creates no

incentiveat all for the private schoolsto economizeon teaching inputs. First, the teacher's

union covers both private and public teachers and private schoolshire only union teachers.

Second, the governmentsubsidyis not a per studentpaymentthat can be used for any input

but rather goes directly to pay the wages of teachers. A simplemodel of teacher power would

predict that a teacher input subsidyto private schools is the politicaloutcomein the situation

42
where teachers are powerful and parents demandschool heterogeneity(on "taste"grounds,

such as ideologicalor religious)as this allows schoolsto competein parental tastes without

jeopardizing teacher's welfare by competingin costs or input mix (James, 1987).

Decentralization/localization/parental
participation. In implicit recognitionof the

incentiveproblems inherent in centrallycontrolledpublic provisionof schoolingthere have

been a number of movesto increaselocal control over schools. These range from

"decentralization"type reforms which shift the governmentalauthoritywith control over the

provisionof schooling, from federal to state (provincial),or state (provincial)to municipal, to

"localization"or "schoolautonomy"initiativesto move more control over schools from

whateverlevel to the schoolsthemselves.

Within the context of our model the impact of jurisdictionaldecentralizationon average

performancedepends entirelyon how much it alters power between educatorsand parents.

First, merely moving from federalto state control seemsunlikely to changemuch as moving

to a quite low level would seem to be necessaryto bring about real shifts in relative strengths.

Second, much depends on how and how well teachers are organized. If teachers are organized

effectively at a geographiclevel higher than that of the schooladministration(e.g. national

unions versus local schoolboards) then some of the most crucial decisions(e.g. level and

structure of teacher wages, class sizes, work conditions)may be outsidethe scope of control of

the local schoolauthorities.

The impact of school "localization"or direct parentalparticipationwill depend to a

large extent on the degree to whichthis shift fundamentallychangesthe balancebetween

teacher and parent interests. Most decentralizationsare of the type in whichparent groups are

43
given specific responsibilities(like mobilizingadditionalexpenditures)but do not have

managerialcontrol, particularlyover monitoringteachers, teacher hiring and firing, teacher

wages, etc. This is the level of decentralizationmost often observed, perhaps precisely

because teachers resist comingunder the authorityof parents, either in instructionwhich is

naturally thoughtto be their professionalprerogative, but also in wages and work conditions,

where they would prefer to negotiatea centrallybargainedsolution. In this case one would

expect the experienceof decentralizationto have mixed results, as it will have some, but

modest, impacts on schoolperformance.

There is anotherkind of reform sometimescalled "decentralization"which is more

about the autonomyof the individualschool from a larger administrativeor political unit.

Some versions even propose "teacherautonomy"implyinga greater control of individual

teachers over classroompracticesand instructionalmethod. Here it is obvious that "control"

over different aspects of the overall educationalprocess are being discussed. Suggestingthat

individualsshouldbe able to choose their own health care provider to increase patient power to

discipline supplinghealth markets does not imply a loss of professionalautonomyof surgeons

over what happens on the operatingroom. In fact, in an environmentwith greater consumer

power, institutionswhich providegreater autonomyat the organizational(e.g. school,

hospital)and professional(e.g. doctor, teacher)level may do even better than institutionswith

centralizedcontrollingbureaucracies. Greater parentalpower might not increase or decrease

teacher and school power, but rather change its dimensions.

44
Conclsion

Even though it is shockinglysimplistic,there are enormousadvantagesto thinking

through the implicationsof positivemodels of the allocationof expenditures. In particular,

these models have strong implicationsfor the expectedresults from the estimationof an

educationalproductionfunction: in any optimizingmodel marginalproductper dollar of all

inputs in increasingthe value of output shouldbe equalizedat the point chosen. However, no

study that we know of ever tested that hypothesisand did not reject it. Nearly every study

finds that the "costeffectiveness"of educationalinputsdiffers by almost an order of

magnitude, or more. These results are too strong and the pattern of the relative cost-

effectivenessamong inputs too consistentto be happenstance. Spendingon educationalinputs

is systematicallyaffectedby how much weight teacher related inputs have in determiningthe

allocationof spendingacross inputs, independentof their impact on outputs.

Given the evidence, we think the correct model that describesthe actual allocationof

educationalexpendituresmust includethe fact that educatorshave enormousinfluence over the

allocationof spendingand that spendingis biased towardsthose educationalinputs that also

directly increasethe welfare of teachers. Crudelyput, teachers lobby (and form unions, and

strike, and write) and books and desks do not. Parents generallyhave been insufficiently

strong on behalf of books. This implies that the main role of the estimationof educational

productionfunctions is not to inform an optimizingpolicy maker of the "true"technical

production functionbut rather to provide the informationnecessaryto encouragedeeper

educationalreforms that changethe structure of decision makingpower.

45
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Appendix 1: Two other reviews of the literature.

Table A.1: Confirmationratios of the significanceof various inputs sorted by direct impact on
educator welfare from 96 studies in developingcountries
Numberof Positive Negative Confirnation
Input studies (significant) (significant) Insignificant Percentage

Teacher'ssalary 13 4 2 7 30.8
Schoolteacher-pupilratio 30 8 8 14 26.7
Teacher'seducation 63 35 2 26 55.6
Teacher'sexperience 46 16 2 28 34.8
Schoolfacilities 34 22 3 9 64.7
Source:Harbisonand Hanushek,1992.

Table A.2: Confirmation ratios of the significanceof various educational inputs sorted by their
directutilityto educators,fromstudiesin LatinAmerica.
Numberof Positive Negative Confirmation
Characteristic studies relation relation No relation Percentage

Teacher'ssatisfaction 43 4 2 37 9.3
Schoolstudent/teacherratio 21 2 9 10 9.5
Teacher'syears of schooling 68 31 4 33 45.6
Teacher'syears of experience 62 25 2 35 40.3
Teacher'ssubjectknowledge 19 9 1 9 47.4
Schoolinfrastructure 70 23 2 45 32.9
Accessto textbooksand other reading
materials 17 13 0 4 76.5
Schoolaccessto other instructional
materials 34 14 3 17 41.2
Source: Velez,Scheifilbein,andValenzuela,1993.

49
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DevelopingCountries

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Debt

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