Household Input Substitution
Empirical evaluations of school funding often ignore behavioral responses from households, failing to account for how families adjust private educational spending when public resources increase. When public grants are predictable, households offset public investment by reducing private spending on education.
Picture this
When a family learns that a school will supply free educational goods like notebooks and writing materials, the family reduces its own educational purchases and redirects those funds toward other household needs. This process resembles a person filling a water tank who turns off their own hose when a neighbor begins filling the tank for them, leaving the total water level unchanged.
What the evidence says
In Year 2 of the Indian experiment, household education spending dropped by 0.76 dollars for every 1 dollar of anticipated school funding (elasticity of -0.21, p < 0.01), demonstrating substantial crowding out of 50% to 100%.
- Who
- Sample included 200 primary schools in rural Andhra Pradesh, India (~37,004 student-year observations) and 172 schools (540 matched households, 1,195 children) in Zambia.
- How
- Randomized controlled trial across two academic years in India combined with instrumental variable estimation using catchment cohort size in Zambia.
What to do
Structure educational grant programs so funding is either unpredictable or restricted to non-fungible services that households cannot independently purchase and offset.
From the source
"Evaluated at the mean, we find that for each dollar provided to treatment schools in the second year, household spending declines by 0.76 dollars."
School Inputs, Household Substitution, and Test Scores