Distorted Quality Signals in School Markets

Information plays a key role in markets with consumer choice. In education, data on school quality is often gathered through standardized testing. However, the use of these tests has been controversial because of behavioral responses that could distort performance measures. 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 indicate that undesirable responses to test-based accountability systems may impose significant costs on educational markets.