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Abstract: Public schools in Chile receive a per-student subsidy depending on enrollment, and are managed by local governments that operate under soft budget constraints. In this paper, we study the effects of this system on per-student expenditures. Per-student expenditures on rural areas are 30% higher than in urban areas. We find that about 75% of this difference is due to the fact that rural public schools are significantly smaller and thus do not benefit from economies of scale. Besides, we also show that in our preferred estimates about 50% of the students in rural areas could be moved to schools that could exploit economies of scale—i.e., these students could attend bigger schools traveling at most an hour a day in total. We show that even if we use conservative average speed rates or control for transportation, utility and infrastructure costs, there is a sizeable share of the students that could be consolidated. We argue that local governments that have soft budget constraints do not consolidate these schools giving the existing potential because of political factors: closing schools is harmful for mayors in electoral terms. Consistent with this claim, we find that a decrease in the degree of political competition in areas with better access to non-voucher transfers from the central government (i.e. with softer budget constraints) decreases the extent of the inefficiency.

Keywords: School size, rural schools, consolidation, Chile, education decentralization, political economy, soft budget constraints
JEL: I22, H52, H75