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Whether increases in school inputs lead to better education outcomes is essential for education policy-making. While empirical studies that aim to estimate this causal relationship abound, a consensus is lacking. One confounding factor that has mostly been ignored in the literature is the behavioral response of households to changes in public education policies by varying their own education inputs. This paper studies how increases in government spending on public schools affect household education spending in urban China. We use detailed information about household spending on public school tuition, textbooks, and private tutoring from the 2002-2006 Urban Household Survey data and focus on households with children in compulsory education (Grades 1-9). We provide evidence that municipal public education spending in China is exogenous to household preferences, and this allows us to identify a causal relationship. In a model controlling for city fixed effects, year-province fixed effects, local per capita GDP and growth rate of number of basic education students, and a wide range of household characteristics, we find that increases in public education spending lead to significant decreases in household spending on public school tuition and private tutoring but no change in spending on textbooks. In addition, while the reduction in household spending on tuition is quite homogeneous across income quintiles, the reduction in household spending on private tutoring comes primarily from the lowest income households,
suggesting diverse educational demand. Moreover, the impact on private tutoring spending
differs for metropolitan areas and smaller cities.
UC Berkeley on May 6-7, 2011 Link to Book