David Figlio and Cassandra Hart [340K PDF]:
School choice option including both voucher and neo-voucher options like tuition tax credit funded scholarship programs have become increasingly prevalent in recent years (Howell, Peterson, Wolf and Campbell, 2006). One popular argument for school choice policies is that public schools will improve the education they offer when faced with competition for students. Because state funds are tied to student enrollment, losing students to private schools
constitutes a financial loss to public schools. If schools face the threat of losing students and the state funds attached to those students–to private schools, they should be incentivized to cultivate customer (i.e., parental) satisfaction by operating more efficiently and improving on the outcomes valued by students and parents (Friedman, 1962).
Alternatively, vouchers may have unintended negative effects on public schools if they draw away the most involved families from public schools and the monitoring of those schools diminishes, allowing schools to reduce effort put into educating students (McMillan, 2004).1
It is notoriously difficult to gauge the competitive effects of private schools on public
school performance because private school supply and public school performance affect each other dynamically (Dee, 1998; McEwan, 2000). In cross-section, the relationship between private school supply and public school performance could plausibly be either upward-biased or downward-biased. On the one hand, private schools may disproportionately locate in communities with low-quality public schools. In such a case, the estimated relationship between private school penetration and public school performance would be downward-biased. On the other hand, if private schools locate in areas with high valuation of educational quality, then the