224 L. Pritchett, D. Filmer Economics of Education Review 18 1999 223–239
are only tenuously related to measured academic achievement.
We build on Hanushek’s argument that since budget differences do not account for performance differences,
the incentives that determine how well the budget is spent likely play an important role Hanushek, 1995.
We argue the evidence is grossly inconsistent with the assumption that resources are allocated to maximize edu-
cational output however defined. The key indicator of this misallocation is that the cost effectiveness, or
achievement gain per dollar, of teacher related inputs is commonly orders of magnitude lower than alternative
inputs. This relative overspending on inputs that are of direct concern to teachers is so pervasive that it is con-
sistent only with a positive model of the allocation of education spending in which teacher welfare directly
influences spending, over and above its impact on school quality.
We want to stress that although we argue that the evi- dence is consistent with enormous inefficiencies in edu-
cation spending due to relatively high spending on teacher inputs, this should not be construed as an attack
on teachers, who are the backbone of any educational system. “Government” actions are neither deus ex mach-
ina nor satanas ex machina, but the result of the interac- tion of differing interests. Suggesting that educators
defend their interests is a methodological assumption common to all economics, not an ad hominem attack.
Just as there are “market failures” intrinsic to the incen- tives of allocation by decentralized, uncoordinated
exchanges, there are “government failures” which are equally inherent in the structure of incentives created by
allocation through the political process.
4
The political pressures for the misallocation of expenditures across
functional categories detailed here for education are almost certainly present in other sectors: health clinics
with personnel but without drugs or clean needles, high- ways without maintenance, or agricultural extension
workers without transport are all depressingly common in developing countries.
When performance is more a function of incentives than of expenditures the policy implications are less
obvious. While in some cases merely increasing the budget is the appropriate educational policy, it is increas-
ingly recognized that in many other situations more fun- damental reforms that enhance the importance of outputs
4
Although it should be pointed out this trend in considering market and government failures is a renewed, not new, interest
for economists. For example, Pigou 1912 states: It is not suf- ficient to contrast the imperfect adjustments of unfettered priv-
ate enterprise with the best adjustment economists in their stud- ies can imagine. For, we cannot expect that any State authority
will attain, or will even whole heartedly seek, that ideal. Such authorities are liable alike to ignorance, to sectional pressures,
and to personal corruption by private interest.
of education in spending decisions are necessary Inter- American Development Bank, 1996.
2. Theories of the allocation of expenditures
This section first explains why some behavioral theory of expenditure allocation is necessary for understanding
the results of empirical examinations of the determinants of educational outcomes. We then present a series of
simple illustrative positive models of educational expen- diture allocation that aid in the interpretation of the
empirical literature.
2.1. Why it takes a theory Possibilities are always limited by technical con-
straints. A “production function” is an expression for the maximum amount of output possible for an amount of
inputs. By applying this metaphor to education one can talk of an “educational production function” which is
determined by an underlying, undoubtedly extremely complex, pedagogical processes. But even though the
production function is derived from technical, not behavioral relationships, one needs a behavioral theory
to understand the results of empirically estimating a pro- duction function for two reasons.
First, a second algebra book will likely help a student less than the first, and a tenth book much much less.
Since the learning gain from additional inputs is not con- stant the contribution of an input depends on the rate of
input utilization at which it is assessed. This is parti- cularly important in educational research, as there is a
crucial distinction between testing whether inputs have low productivity at their current rate of application ver-
sus testing whether they are “inputs” at all.
5
Teachers, classrooms, and instructional materials are clearly inputs
into education. If we’re to understand statistical tests of whether the effect of class sizes or teacher wages are
different from zero as tests of whether these inputs ever matter the whole endeavor appears silly and pointless
which has often been the reaction of the education com- munity to this line of empirical research. However, as
the example described above suggests, a failure to reject zero marginal product of higher teacher wages or
reduced class sizes may simply mean that the rate of
5
By analogy one could study the effect of either fertilizer or Mozart piano concertos on corn production. Even though at
sufficiently high rates of application the size of fertilizer’s impact could be small or even negative, fertilizer is clearly
an input, and the only question is the magnitude of the impact at various rates of application. On the other hand, Mozart’s
music, while delightful, might not be an input into corn pro- duction, in the sense that it has zero corn production impact
across all soil conditions, concerti, and volumes.
225 L. Pritchett, D. Filmer Economics of Education Review 18 1999 223–239
application is so high that the marginal product at the chosen rate of application conditional on other inputs
is statistically indistinguishable from zero.
6
Nearly all education production function studies are not experi-
ments in which input use is chosen by a researcher, but rather use data drawn from reality. In reality, the spend-
ing on inputs e.g. teacher wages, class sizes, buildings, textbook use is chosen for reasons other than research
and since input use is chosen, the theory of the input choice predicts the rate of application and thereby
observed input productivity.
Second, the policy implications of empirical findings depend critically on the theory of input choice. If the
input use is the result of a political process, changes may not be feasible without changes in the underlying process
that determines budgets. Recommendations like “spend more on input x” are not necessarily valuable contri-
butions to policy making when policies are endogen- ously politically determined.
2.2. Elements of a theory behind education production functions
In this section we sketch several possible positive theories of expenditure allocation that might underlie
production function estimates a more detailed derivation of the relationships discussed can be found in Appendix
A. The most simple positive model of spending is that inputs are chosen to maximize the production of a single
educational output call it “S” for scores. This theory implies that the marginal product per dollar will be equa-
lized across all inputs.
7
That is
6
The “meta-analysis” approach to creating statistical signifi- cance is problematic, in that it ignores the actual underlying
policy question and the asymmetry in what the two sides of the “money matters” debate are actually asserting. That is, if the
impact of teacher inputs e.g. salaries, class size is not demon- strably different from zero this is not to say it is everywhere
and always zero, but that it is unlikely to be optimal, in the normative sense of maximizing production. However, showing
only that teacher inputs, or budgetary inputs generally, have some impact which can be done with meta-analysis, e.g.
Hedges, Laine, Greenwald, 1994 does not address the ques- tion of whether input levels are optimal.
7
While this is generally being presented as a normative model, what a person would do if in fact they wanted to optim-
ize, the simplest behavioral model is to assume the normative model is the positive model. That is, just assume that the
chooser actually behaves as if heshe were optimizing. While this assumption is heroic, it is implicit and sometimes explicit
in nearly all education production function research. For example, to estimate and interpret the cost function as the dual
of the production function requires the assumption of maximiz- ation Jimenez, 1986; Jimenez, Paqueo, 1996; James,
King, Suryadi, 1996.
f
S i
p
i
2 f
S j
p
j
5 0, ∀
i,j 1
where i and j are any two inputs, f
i S
is the marginal pro- duct of input i in producing output S, and p
i
is the price of input i.
8
Basic schooling transmits more than information: it is also intended to convey acceptable patterns of social
interaction, and cultural norms and beliefs, and political ideals Piccioto, 1996. A simple positive model of input
choice in the production of multiple, say for simplicity two, outputs S scores and C “citizenship” would
imply that the marginal value product of both inputs is equalized:
F
f
S i
p
i
1 p
c
h
C i
p
i
G
5
F
f
S j
p
j
1 p
c
h
C j
p
j
G
, ∀
i,j or equivalently,
f
S i
p
i
2 f
S j
p
j
5 p
c
F
h
C j
p
j
2 h
C i
p
i
G
, ∀
i,j 2
where h is the production function for output C, and p
c
is the relative value placed on S and C. This introduction of multiple outputs implies if one
input is relatively more productive in the production of one type of output “citizenship” then its input use will
be higher and hence marginal product per dollar in scores production lower than if one were optimizing
over scores alone.
A very simple alternative positive model embeds potentially both of the output optimizing models as a
special case. Suppose expenditure allocations are made to optimize over both educational production assume
just a single output S for simplicity but also teacher utility T directly. This implies that inputs would be
chosen so that:
F
f
S i
p
i
2 f
S j
p
j
G
5 a1 2 d
1 2 a 1 ad U
x
F
g
j
p
j
2 g
i
p
i
G
3 where a is the weight given to teacher’s utility relative
to “scores”, d is the degree to which teachers derive util- ity from the test scores of their students, U is the utility
that teachers derive directly from spending on inputs, and
i
is the relative value of input I to teachers’ utility see appendix 1 for details of this derivation. The implication
of 3 is that the more directly an input enters teacher utility a higher g
i
the lower the marginal product per dollar of that input in producing the educational output
S will be at the chosen allocation of inputs, relative to
8
There could be simple variants that introduce decision maker ignorance or uncertainty about the production process
with the only change being that the equation will hold in the decision maker’s beliefs.
226 L. Pritchett, D. Filmer Economics of Education Review 18 1999 223–239
the output maximizing level. The intuition is clear: since the chooser of inputs cares directly about teacher utility
this will lead to a higher level of spending on inputs that teachers care about and if marginal products are declin-
ing with higher rates of use this higher level of utilization will lead to a lower marginal product per dollar of that
input. In this model, the marginal product per dollar of inputs that teachers value directly e.g. wages will be
smaller than the marginal product per dollar of inputs which teachers value indirectly e.g. smaller class sizes,
better physical facilities which, in turn, will be smaller than those that teachers value only because of their effect
on achievement e.g. books. The difference in marginal products will be larger, the larger the weight on teacher
utility a and the smaller the teacher valuation of edu- cational outputs d.
Fig. 1 illustrates the case with only two hypothetical inputs, call them “books” and “wages” for concreteness.
The educational output optimizing choice would be to choose point A, where the educational output isoquant,
9
whose slope is the relative marginal product of books to teachers, is tangent to the budget line, whose slope is the
relative price of books to teachers with the same budget. At this point the first order condition 1 for an interior
maximum are reached. With the same budget, adding teacher’s utility directly to the chooser’s objectives
implies a new equilibrium with more teacher and less book spending point B. This higher level of spending
reduces the marginal product per dollar of teachers illustrated in the southeast quadrant and increases the
marginal product per dollar of books illustrated in the
Fig. 1. Score versus other objective maximizing; implications
for marginal products per dollar of inputs.
9
The combinations of books and teachers that produce con- stant amounts of educational output.
northwest quadrant, which were equal when the objec- tive function included only achievement. Starting from
a production optimizing allocation, if teacher’s utility is added to the objective function, relatively less is spent
on “books” and relatively more is spent on “wages” so that at this new rate of input utilization the marginal pro-
duct per dollar of “books” is high relative to the marginal product per dollar of “wages.”
2.3. Three possible models underlying the model The last positive model simply assumed only that the
decision maker cared about teacher utility, hence it is more of a description of a broad class of models. We
have not articulated a complete model which specifies which person or entity controls the allocation of spend-
ing a school board? a legislature? the ministry of education? nor why exactly that person or entity cares
directly about teacher welfare. While for many of our conclusions the exact model is not important, predictions
about the impact of specific reform need a more com- plete model. There are at least three prototype models
that could generate an objective function that produces something like 3: principal-agent, teacher power, and
patronage, each of which would have different impli- cations for policy.
2.3.1. Principal-agent Suppose the decision maker is the parents or equival-
ently a manager that faithfully represents parent interests but is uninformed about the production func-
tion. In this case, as with other professional services such as medical practitioners, teachers will systematically
misrepresent the production function so as to lead the chooser of budgets to choose greater spending on those
inputs that teachers prefer. The source of teacher “weight” in the objective function a is superior knowl-
edge by teachers about the production function. This principal agent effect would extend to the private sector
as well if parents are misinformed about the true pro- duction function, although potentially mitigated by com-
petition among providers.
2.3.2. Teacher power The second possibility is that the decision maker is a
politician e.g. minister of education or political insti- tution e.g. legislature or school board that controls
budgetary allocations. Given that on issues like teacher wages educators have a very clear and direct interest,
they may be more successful at organizing to influence public decisions than are parents. In this case, the prob-
lem is not that parents are systematically under-informed about the production function, but that parents have
greater difficulty overcoming the free rider problem inherent in collective action than do teachers Olson,
1965.
227 L. Pritchett, D. Filmer Economics of Education Review 18 1999 223–239
2.3.3. Patronage Another possible model with political decision makers
is that teachers are not particularly powerful but that the decision maker is powerful. Suppose that the Minister of
Education can allocate all jobs and each job creates a favor. In this case teachers may well want high salaries
but the chooser may prefer teacher salaries to be rela- tively low but at a slight premium so that the job is a
“favor” but would want to maximize the employment of teachers. In this case teachers would be individually
poorly paid but there would far too many teachers and an inflated wage bill for teachers. Before moving to the
empirical evidence we should point out that overspend- ing on teacher inputs need not imply that teachers are
individually “overpaid”, a point we return to in the final section.
10
Nor are we arguing “too much” is spent on education as we do not model the determination of the overall
budget for education, which could be low. In many cases spending on teachers or the budget overall is “too low”
in any absolute sense, even if teacher spending is “too high” relative to the productivity of other inputs.
3. Our reading of the evidence
