School Competition, Classroom Formation, and Academic Quality

Racial segregation is an enduring feature of U.S. K-12 education. Up to half of it originates within schools due to how classrooms are formed. This paper develops an empirical framework to understand the implications of discretionary classroom formation in competitive education markets. I leverage a school competition reform to document via an event-study that in anticipation of a competitive shock, public schools both raise their academic quality and change students’ assignments to classrooms such that classroom segregation increases. I then estimate an empirical model of school choice and competition to understand whether schools choose their level of classroom segregation so as to differentiate horizontally, thereby relaxing vertical competition on costly academic quality. The model’s novelty is that it embeds classroom segregation both on the demand side, as a dimension that parents have preferences over, and on the supply side, as a margin of differentiation that schools choose directly alongside academic quality. I estimate preferences for classroom segregation so as to rationalize the reduced-form effects of competition identified through the event-study. I use the model to evaluate a policy that requires schools to form racially integrated classrooms, given the composition of the student body at the school. I find that the policy raises aggregate academic quality and the average test score in equilibrium. Magnitude-wise, present value lifetime earnings rise by up to $1,620 per student. Since the schools that increase academic quality the most are located in non-white areas, learning gains accrue mostly to non-white students, decreasing the racial test score gap by 2%.