Scale economies can offset the benefits of competition: evidence from a school consolidation reform in a universal voucher system

This paper presents estimates of the general equilibrium effect of school choice and competition on achievement of primary school pupils in the Netherlands. For identification we exploit a change in the rule that determines schools' minimum required size. Before the change this size was a step-function of municipalities' number of inhabitants. After the change it is a concave function of pupil density in a municipality. On average the number of schools decreased by 15 percent, but this varied considerably across municipalities. We find that reducing the number of schools by 10 percent increases pupils' achievement by 3 percent of a standard deviation. In the Dutch system with free choice, a reduction in the supply of schools not only implies a reduction in school choice but, for a given number of pupils, also implies an increase in average school size. We present evidence that supports the hypothesis that in our context, scale economies dominated the effects of choice and competition. This result points to an often ignored trade-off between the benefits of choice and competition and the benefits of scale economies.