Quality of Schooling, Returns to Schooling and the 1981 Vouchers Reform in Chile

Abstract

In 1981, Chile introduced nationwide school choice by providing vouchers to any student wishing to attend a “voucher school”. We use a binary instrument based on the reform and unique information on individual cognitive skills to examine the importance of cognitive skills on labor market outcomes. The results suggest that the main beneficiaries of the reform were those who at the time were pupils in basic schooling. Once the treated group is expanded to include older (secondary school age) students, schooling premiums decrease dramatically while the return to cognitive skills increases accordingly, suggesting that a large part of the estimated return from a typical earnings function is due to classical ability bias. Overall, the findings point to heterogeneous effects of the reform.