Asymmetric Information, Parental Choice, Vouchers, Charter Schools and Stiglitz

The story goes that tuition voucher schools and charter schools are creatures of the spirit of capitalism¹ and that public funding of them will increase competition, making all schools more efficient and academically better, especially public schools. For that theory to work it is hypothesized that parents as “rational people will make choices as to the education of their children in perfect markets.”² In the realm of economics, this reasoning is called the “rational expectations hypothesis” or the “efficient markets hypothesis.”

The “efficient markets” notion applied to schools via parental choice means that parents will, in their wisdom, utilize public money to send their children to private schools and that ipso facto the education level of the nation rises commensurate with the level and intensity of competition among parents in choosing private, clerical and/or corporate charter schools. For the education level to rise requires, of course, that parents will make rational decisions relative to quality education. Essential to the concept is that parents have the knowledge necessary to make informed educational choices. In a perfect market, information is presumed to “flow like water–faster than water,”³ and it is necessary that those things irrelevant to quality education, or even detrimental to it, are not present in parental decision making. If parental choice is not based on quality education and instead the school choices are rooted in race, religion, wealth, ethnicity, etc., then you will have “imperfect competition.” Imperfect competition would result in the overall decline in the quality of education.

In the economic marketplace, “rational expectations,” serve as the engine to improve the economy. At bottom, these expectations of individuals and corporations foster efficiency, production costs fall and profits increase. Improvement of educational quality via a scheme of parental choice, however, is much more complex. If the state seeks to drive its economic progress by means of the wisdom of parental choice, it must be sure that the parental choices add to some worthwhile store of knowledge for the next generation. That education in which public money is invested must be calibrated to the end of producing productive knowledge, the “training of intellect” and is designed to “stimulate the mind of the individual to improve his present condition, and [that it] aids him in devising ways and means to do so.”⁴

Thus, the basic voucher and charter school theory is that the nation will improve its standard of living by having parents use public tax money to make choices of schools based on their own information, knowledge, and perceptions of educational reality. It assumes that parents know what constitutes quality education, and that they have rational expectations as to the quality of science programs, mathematics, reading, political thought, literature, and all the liberal arts.

However, unfortunately, experience indicates that parental choices are ensnared and limited by the parents’ own limited experiences, level of learning, ignorance, biases, and mythology on which they depend to make educational choices for their children and is, thus, in most cases, highly suspect.⁵ Such problems with rational choices are recognized by a school of economics known as “behavioral economics” that attempts to enter into the economic equation the actual motivations of individuals in the marketplace.

Parental choice is drawn into question by behavioral economic thought that reveals that standard economic theory relies on the misconception that individuals have well informed rational preferences in exercising choices. Yet, in fact, preferences may not be rational nor reasonable, but rather may be based on prior beliefs that influence the processing of the information on which choices rely. Information that is consistent with parental prior beliefs is deemed by them to be relevant to their choices and the information that is inconsistent with their prior beliefs is “ignored, discounted or forgotten.” Such fictions weigh heavily in skewing choices away from rationality.

Behaviorists also argue that the summation of individual choices, in totality, cannot be relied upon to ensure the progress of mankind and the enhancement of the public good. The aggregate does not necessarily produce rationality; rather, it is more likely to result in inefficiency and inequality.⁶ The behaviorists...