In the last century, public schools changed in ways that dramatically reduced the control that parents have over their local schools. Regaining that control is one key to improving the quality of our schools, and giving students a choice of schools is one way of increasing the influence that parents have over the way schools are run. Several types of school choice have arisen in recent years, including magnet and charter schools. But when these are reviewed in terms of outcomes and incentives, charter schools are found to have a much better chance of providing the competitive pressure necessary to improve the quality of public schools.School choice

Eric A. Hanushek

English

Research Papers in Economics

March 15, 2006
Federal Reserve Bank of Cleveland
Choice, Charters, and Public School
Competition
by Eric A. Hanushek
ISSN 0428-1276
In the last century, public schools
changed in ways that dramatically
reduced the control that parents have
over their local schools. Regaining that
control is one key to improving the
quality of our schools, and giving stu-
dents a choice of schools is one way of
increasing the influence that parents
have over the way schools are run.
Several types of school choice have
arisen in recent years, including mag-
net and charter schools. But when
these are reviewed in terms of out-
comes and incentives, charter schools
are found to have a much better
chance of providing the competitive
pressure necessary to improve the
quality of public schools. 
W hen historians review the changes
in schools over the twentieth century,
two things are likely to stand out. First,
there has been a dramatic consolidation
of school districts, leaving fewer but sig-
nificantly larger districts. Second,
schools have become more unionized.
Historians may not see the interaction of
these two things, but it is just that inter-
action that makes new forms of competi-
tion among schools so important.
Improving our schools in the twenty-
first century is likely to rest on develop-
ing forms of school choice—vouchers,
charters, and other institutions—that
counteract these two forces.
School choice comes in a variety of
forms ranging from deciding where to
live to home schooling.  This Commen-
tary contrasts two important forms of
public-school choice that have devel-
oped: open enrollment programs and
charter schools.
■ The Concept of School
Choice
In the twentieth century, the United
States led the world’s schooling trans-
formation and went from a small, elite
schooling system to one that was signifi-
cantly changed in breadth and depth.
Universal schooling with later and later
schooling ages became the norm
throughout the country. 
But with these positive changes came
others that made the schools less acces-
sible to the direct control of local par-
ents. First, school districts consolidated.
In 1937, there were 119,000 separate
public school districts. Today, there are
fewer than 15,000. 
One important result of this consolidation
is less choice in public schooling. With a
limited number of larger districts, the
decision making and management of
school districts effectively moves away
from the local population. Larger districts
also mean that there are more diverse
preferences for what the parents want in
their schools, and compromises must be
made across the various interests.
Second, as districts consolidated, fund-
ing also changed dramatically. In 1930,
less than 
1/2 percent of revenues for ele-
mentary and secondary schools came
from the federal government, and less
than one-fifth came from states, leaving
over 80 percent to be raised locally. By
2000, the local share was down to 
43 percent with both federal and state
shares rising. As states have become
more prominent in the funding of
schools, they have also moved toward
more centralization of decisions about
the operations of the schools—with 
the result that school decisions have 
further migrated away from the parents 
and local voters and toward state
bureaucracies. 
If the parents directly control the funding
of the schools, parents can exert some
influence about what the school does,
simply because the schools realize that
their support is directly related to pleas-
ing the parents. But, with large and
diverse districts and with funding deci-
sions made increasingly elsewhere, the
incentives for schools to please the 
parents fall. 
Parents can of course move to new
school districts, and their ability to do 
so can exert a degree of competitive
pressure on public schools. But this view
of shopping across alternative jurisdic-
tions does have important limitations.
For a variety of reasons, the public
schools might not look too different
from each other. State restrictions, the
limited viewpoints of school personnel,
and other things could lead schools to be
quite similar in approach, curriculum,
and goals. Job locations can also dra-
matically limit the number of relevant
school districts.
Restoring the ability of parents to enter
easily into the schooling process will
depend crucially on developing and 
sustaining new ways for them to exer-
cise choices. The fundamental underly-
ing the idea of expanded choice in public schooling is that freeing up con-
sumer demand can have a variety of
beneficial effects. Consumers can select
the alternative that best meets their
interests and desires. Importantly, since
few consumers like overpriced goods,
such demand pressure could lead to effi-
ciency and innovation in education. If
one school did not provide good value,
it would tend to lose students to a com-
petitor that offered more for the level of
spending. It is precisely these incentives
that are most important in assessing the
issue of school choice.
Milton Friedman was one of the first
scholars to promote the idea of
expanded choice in schools. He argued
in Capitalism and Freedom that the gov-
ernment may want to intervene in the
area of education for a variety of rea-
sons, but none of the potential reasons,
including ensuring a minimal level of
education in the population or enabling
children of the poor to attend schools,
requires that the government actually
run the schools (Friedman, 1962). Fried-
man identified the now obvious alterna-
tive to government-run schooling—
providing vouchers to parents. These
vouchers would transfer funding to the
school that a parent chooses.
Yet, with some exceptions in special cir-
cumstances such as the Cleveland situa-
tion or the early political anomaly of
Milwaukee choice, the voucher idea has
yet to be met with much policy success.
Perhaps the most obvious factor is the
rise of teacher unions. When vouchers
were first suggested, unions were not
pervasive. Their subsequent rise and
increase in power has forever changed
our ability to introduce any radical pol-
icy in schools. Competition in schools
in particular implies that the job security
of current personnel would be threat-
ened, and any hint of even experiment-
ing with choice has been vigorously
attacked by the unions. They have been
very effective at resisting any such
change, including mounting powerful
media campaigns to prevent citizen ref-
erenda on vouchers from being adopted. 
A particularly effective argument in the
public relations war over vouchers has
been that giving money to private
schools would harm the public schools
and that we should instead be working
to improve the public schools. A second
argument is that private schools are not
under the control of the government, so
there is no accountability for the gov-
ernment funds that are provided. The
sound bite summary has been the mantra
of a number of people: “they are for
choice but it should be restricted to pub-
lic school choice.” This position has
been particularly popular among politi-
cians who want to protect the existing
public schools from any competitive
pressures while still seeming open to
more fundamental reforms of schools.
Yet citizen sentiment for expanded choice
has generally increased over time, and
this has led to a variety of innovations in
school choice that fit the notion of public
school choice. Importantly, they are not
all the same, and they have very different
incentive effects. Two quite different
kinds of choice stand out: open enroll-
ment or magnet school plans and charter
schools. It is useful to review these in
terms of outcomes and incentives.
■ Public School Choice
A particularly popular version of public
school choice involves an open enroll-
ment plan. For example, any student
could apply to go to a different school in
their district rather than the one to which
originally assigned. Or in a more expan-
sive version, no initial assignment is
made, and students apply to an ordered
set of district schools. A common ver-
sion of this has been the use of magnet
schools that offer a specialized focus
such as college preparatory or the arts.
Forms of open enrollment plans were the
response of a number of Southern dis-
tricts to the desegregation orders flowing
from Brown v. Board of Education. In
general, simple open enrollment plans
were not found to satisfy the court
requirements for desegregation of dis-
tricts, but magnet schools (with racial
balance restrictions) became a reason-
ably common policy approach (Armor,
1995). In 2001–02, three percent of all
students attended a magnet school 
(Hoffman, 2003).
As a general rule, magnet schools pro-
duce few of the incentives that lie behind
voucher plans. The flows of students are
heavily controlled by the common
restrictions that space must be available
and that other purposes such as racial
balance are met. Most important, how-
ever, these plans seldom have much
effect on incentives in the schools. Under
open enrollment, personnel in undersub-
scribed schools generally still have
employment rights and would simply
move to another school with more stu-
dents. Opening open enrollment across
districts conceptually provides stronger
incentives but unattractive funding con-
sequences, and the “if there is space at
the school” clause generally stops all but
some token movement.  
A different development, charter
schools, appears to offer stronger choice
incentives. Charter schools differ dra-
matically by state, but the essential fea-
ture is that they are public schools that
are allowed to operate to varying
degrees outside of the normal public
schools. They are schools of choice, sur-
viving through their ability to attract
sufficient numbers of students. 
These schools can offer true competition
to the regular public schools, because
they can draw students away from
poorly performing regular publics.
Employment rights typically do not
transfer between charters and regular
publics, so there is potentially pressure
on school personnel in charters to attract
students. The pressure on regular public
schools comes from the potential loss of
students, which in turn lessens the
demand for public schools and their
teachers. 
Since the nation’s first charter school leg-
islation was enacted into law in Min-
nesota in 1991, some 41 states and the
District of Columbia have enacted legis-
lation that provides for charter schools,
although some had yet to open any
schools by 2004. For the nation as a
whole, charter schools increased from a
handful in 1991 to close to 3,200 schools
serving almost 800,000 students or over
1.5 percent of the public school popula-
tion in 2004. In some places, charters
have become quite significant. For
example, in the 2003–04 school year, 
17 percent of students in the District of
Columbia, 8 percent of students in 
Arizona, and 4 percent of students 
in Michigan attended charter schools. 
To date, studies of the outcomes of char-
ters have been limited by some serious
analytical difficulties. Because students
voluntarily choose these schools, infer-
ring the impact of the school, as distinct
from the characteristics of the students
that are attracted to it, is always difficult
(this is referred to as a selection
problem). Additionally, because charter
schools are largely new, most are still
going through a start-up phase, and it
takes large inferences to know what they
will look like in the steady state.My own work provides some prelimi-
nary estimates of the performance of
charters in Texas (Hanushek, Kain,
Rivkin, and Branch, 2005). The sim-
plest design that deals with the selection
problems is to compare the average
learning growth for individual students
when in the regular public schools with
their own performance in the charters.
In this way, charter students become
their own control group. 
Three things come out of this in terms
of quality indicators. First, on average
charter schools perform very similarly
to the regular public schools. But, sec-
ond, start-up problems are real, and new
charters do not perform as well as more
established charters, while more estab-
lished charters (those over two years in
age) on average outperform the regular
public schools of Texas. Third, there is
a significant distribution of perfor-
mance across both regular publics and
privates. The good are good, and the
bad are truly bad. 
These findings are consistent with
much of the other recent work, although
there are some remaining uncertainties.
The average North Carolina charter
appears less effective than the average
traditional public school (Bifulco and
Ladd, 2004), while the average Florida
charter is on par with the regular public
schools after a start-up phase (Sass,
2005). On the other hand, relying upon
comparisons between charter applicants
in Chicago that were randomly
accepted or randomly denied admis-
sion, Hoxby and Rockoff (2004) con-
clude that the three charter schools they
observe significantly outperformed
their regular school counterparts.  
These results await, nonetheless, both
the general maturation of more charter
schools and the investigation of their
performance in different settings.
Another important aspect of competi-
tive markets is enforcing a discipline on
the other participants—in this case the
regular public schools. Is there any evi-
dence that the regular public schools
respond to the pressures of competi-
tion? Again, it is very early in the devel-
opment of charters, but Hoxby (2003)
introduces preliminary evidence that
there are competitive improvements.
Our Texas study also provides informa-
tion on competition. If we look at the
behavior of parents, we find that they
are significantly more likely to with-
draw their children from a poorly per-
forming charter as compared to a well
performing charter (Hanushek, Kain,
Rivkin, and Branch, 2005). This finding
is particularly important, because par-
ents are not given information on the
value-added of their charter school. 
The behavior of parents shows, how-
ever, that they are good consumers and
that they can use the performance data
that are available to infer the quality of
the school. An early and continual criti-
cism of the voucher idea is that parents
are not good consumers, an assertion
belied by the data. 
■ Conclusions
The idea of school choice is a natural
extension of arguments about the bene-
fits of competition to education. The
clearest form, advocated originally by
Milton Friedman and picked up by a
wide variety of other people, is to give
parents vouchers that allow them to
shop for schools. While special circum-
stances have led to voucher programs in
Milwaukee, Cleveland, and the District
of Columbia, their growth has been
slow and erratic. 
On the other hand, alternative forms of
choice—flying under the banner of pub-
lic school choice—have become more
pervasive. Some, but not all of these
alternatives offer benefits that are simi-
lar to vouchers. Most notably, charter
schools offer the possibility of options
to students and parents that have the
ancillary advantages of introducing
competitive incentives for schools.
Charter schools are difficult to evaluate.
Nonetheless, the best evidence currently
available indicates that, after a start-up
period, charters have as high if not
higher value-added than regular public
schools. As with regular public schools,
however, there is a wide range of quality
in charter schools. But, importantly, par-
ents appear able to recognize the quality
of charter schools and to act upon that
information by exiting low-quality char-
ters at significantly higher rates than
better-quality charters.
Current personnel in the regular public
schools resist expansion of charters
because they provide what, in their
mind, is undesirable competition. This
resistance takes a variety of forms. In
some states there are strong pressures to
limit the number of charter schools. In
others, arguments that all schools
should have a “level playing field” are
used to justify increasingly stringent
restrictions on the operations of charter
schools. If we are to obtain the benefits
from choice and competition, these
pressures should be resisted.
■ Recommended Reading
David J. Armor. 1995. Forced Justice:
School Desegregation and the Law.
New York: Oxford University Press.
Robert Bifulco, and Helen F. Ladd.
2006. “The Impacts of Charter Schools
on Student Achievement:  Evidence
from North Carolina.” Education
Finance and Policy, vol. 1, no.1 
(winter), pp. 50–90.
Milton Friedman. 1962. Capitalism
and Freedom. Chicago: University of
Chicago Press.
Eric A. Hanushek, John F. Kain, Steve
G. Rivkin, and Gregory F. Branch.
2005. “Charter School Quality and
Parental Decision Making with School
Choice.” National Bureau of Economic
Research,  Working Paper no. W11252,
(April).
Robin R. Henke, Phillip Kaufman,
Stephen P. Broughman, and Kathryn
Chandler. 2000. Issues Related to Esti-
mating the Home-Schooled Population
in the United States with National
Household Survey Data.  Washington,
D.C.: National Center for Education
Statistics  (September).
Lee McGraw Hoffman. 2003.
Overview of Public Elementary and
Secondary Schools: School Year
2001–02.  Washington, D.C.: National
Center for Education Statistics  (May).
Caroline Minter Hoxby. 2003. “School
Choice and School Productivity (or
Could School Choice Be a Tide that
Lifts All Boats?).” In The Economics of
School Choice, edited by Caroline
Minter Hoxby. Chicago: University of
Chicago Press.
Caroline Minter Hoxby, and Jonah E.
Rockoff. 2004. “The Impact of Charter
Schools on Student Achievement,”
unpublished manuscript.
F. Howard Nelson, Bella Rosenberg,
and Nancy Van Meter. 2004. “Charter
School Achievement on the 2003
National Assessment of Educational
Progress.” American Federation of
Teachers (August).Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland, OH 44101
Return Service Requested:
Please send corrected mailing label to
the above address.
Material may be reprinted if the source is
credited. Please send copies of reprinted
material to the editor.
Eric A Hanushek is the Paul and Jean Hanna
Senior Fellow at the Hoover Institution of
Stanford University. He is also chairman of
the Executive Committee for the Texas
Schools Project at the University of Texas at
Dallas and a research associate of the
National Bureau of Economic Research.
This Commentary was adapted from a paper
Dr. Hanushek presented at the Conference on
Innovation and Education, held at the Federal
Reserve Bank of Cleveland on November
17–18, 2005.
The views expressed here are those of the
author and not necessarily those of the Federal
Reserve Bank of Cleveland, the Board of 
Governors of the Federal Reserve System, or
its staff. 
Economic Commentary is published by the
Research Department of the Federal Reserve
Bank of Cleveland. To receive copies or to be
placed on the mailing list, e-mail your request
to 4d.subscriptions@clev.frb.org or fax it to
216-579-3050. Economic Commentary is also
available at the Cleveland Fed’s site on the
World Wide Web: www.clevelandfed.org/
research.
We invite comments, questions, and sugges-
tions. E-mail us at editor@clev.frb.org.
PRSRT STD
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Cleveland, OH
Permit No. 385
Tim R. Sass. 2006. “Charter Schools
and Student Achievement in Florida.” 
Education Finance and Policy, vol. 1,
no.1 (Winter), pp. 91–122.
Charles M. Tiebout. 1956. “A Pure The-
ory of Local Expenditures.” Journal of
Political Economy, vol. 64, no.5, 
pp. 416–24.

Choice, charters, and public school competition

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