Do Educational Vouchers Reduce Inequality and Inefficiency in Education?

Policy debates around the topic of educational vouchers as an approach to im-prove the public educational system are still ongoing and a consensus on the potential benefits or drawbacks has not been reached yet. This paper models the distribu-tional processes entailed by two alternative educational voucher systems, universal and target vouchers, by using an agent based model of a highly heterogeneous school district. Using this approach allows to track which students actually exercise choice and switch schools and thereby evaluate peer effects and at the same time model an endogenous reaction of public schools to increased competition. The results indicate an ambiguous effect of universal vouchers on low income students. The introduction has a negative peer effect on students in low performing schools, due to “cream skimming”, that is highly motivated students leaving the schools. In contrast, stu-dents exercising choice and switching to better schools observe a positive effect. The negative effects are partly alleviated by low performing schools improving their educational services as a response to a decline in enrollment. In contrast, when examining target vouchers which are a function of ability, the paper shows that they allow to obtain the benefits of the increased competition while avoiding the deterioration of the peer group