Distorted quality signals in school markets

Information plays a key role in markets with consumer choice. In education, data on schools is often gathered through standardized testing. However, the use of these tests has been controversial because of distortions in the metric itself. We study the Chilean educational market and document that low-performing students are underrepresented in test days, generating distortions in school quality information. These distorted quality signals affect parents' school choice and induce misallocation of public programs. These results provide novel evidence for the costs that distortions in quality signals generated by standardized tests in accountability systems impose on educational markets. •Standardized testing plays a central role in the generation of quality metrics in education.•We study the Chilean educational system and document a particular distortion in test scores: low-performing students are underrepresented in test days.•We develop a simple statistical procedure to measure how much test-day attendance distorts average school test scores.•We show that distorted quality signals have implications for school choice and the allocation of public programs.