Academic journal article Contemporary Economic Policy

Can P.S. 27 Turn a Profit? Provision of Public Education by For-Profit Suppliers

Academic journal article Contemporary Economic Policy

Can P.S. 27 Turn a Profit? Provision of Public Education by For-Profit Suppliers

Article excerpt


School districts in the United States have begun to use for-profit contractors to provide management and instructional services. Studies of this phenomenon are limited because this alternative to public provision is relatively new. This article begins to fill the void by examining the conditions under which contractors can be financially viable and can improve quality. Also considered is the potential role of contractors in other policies to restructure public education. (JEL L33, I27, I I28)


School districts have begun to enter into contracting arrangements with for-profit firms to provide management and instruction. Numerous articles and books have been written on privatization and contracting as these practices grew in the 1980s. The peculiar characteristics of education, however, warrant special consideration. It is fair to say that education is a primary concern of local governments. The size of public education implies large financial consequences for stakeholders. Moreover, perceived school quality plays a major role in residential decisions. Also, though many services have been privatized or contracted to reduce costs, education contracting appears motivated by the objective of improved quality rather than reduced government expenditure.

This matter only recently has attracted the attention of policy analysts because neither demand-side movement by districts nor supply-side activity by contractors occurred until recently. No one was engaged in this practice, so there was nothing to study empirically. Seemingly spontaneously, contracting districts and operating contractors emerged in the early 1990s. For example, Baltimore and Hartford had contracts with a for-profit corporation, Education Alternatives, Inc. (EAI). The for-profit Edison Project now operates schools in many states across the country.

The limited literature on education contracting falls into three categories: descriptions, preliminary evaluations, and arguments based on ideology. The most ambitious efforts to date, spanning all three categories, are Richards et al. (1996) and Ascher et al. (1996). Discussions are also provided by Hill et al. (1997) and Hill (1997). Lacking is an analytical treatment of two necessary conditions for education contracting to hold promise: the financial viability of contractors, and the likelihood of contracting to improve quality. That is the goal here: to address these two conditions. This analysis is overdue at a time when districts and contractors are entering into contracts with a limited sense of the likelihood of success and factors that affect it. At the outset it should be clear that the approach is more theoretical than empirical for a practical reason. Limited data make generalization difficult, although some studies are available (e.g., U.S. General Accounting Office [1996]).


Calls for policies such as contracting are most likely to occur in an environment of dissatisfaction with the status quo. Hanushek (1997) and others point out that although more resources have been devoted to public education, measures of achievement have not increased and may have even declined. The problems in urban districts with students from low-income families are well documented.

Survey results reported by Elam et al. (1996) are instructive. Only 21% of respondents award an A or B grade to the nation's public schools. The analogous response for nonpublic schools is 57%. The question bearing directly on the matter at hand reveals that about one-third favor privatization of the entire operation of schools.

The state of affairs described above, combined with a zeitgeist of deregulation, privatization, and decentralization at all levels of government, provides an environment for the emergence of contracting. Even in the absence of quality concerns, simply the growth in spending prompts calls for increased nonpublic provision (Baumol, 1993). …

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