March 2020
I use an empirical model of school choice and competition to study how the structure of voucher policy design can influence the incentives schools have to invest in quality. I estimate a model of demand for schools using administrative microdata from Chile leveraging a significant policy change that eliminated out-of-pocket tuition fees for almost half of students at most schools. Demand estimates are combined with a model of for-profit school competition to highlight that a flat voucher with top-off fees leads to heterogeneity incompetitive incentives and contributes to inequality in school quality. While the shift in voucher policy in Chile is shown to be associated with increased academic achievement and a reduced gap between rich and poor, the model also indicates that the large change has general equilibrium effects that preclude rigorous policy evaluation. Counterfactual simulations using the estimated model indicate that the policy shift to a targeted voucher with no top-off fees implemented in Chile diminished local market power of schools in poor neighborhoods and contributed to a supply side driven increase in the academic achievement of underprivileged students.