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We estimate the equilibrium effects of a public-school grant program administered through school councils in Pakistani villages with multiple public and private schools and clearly defined catchment boundaries. The program was randomized at the village-level, allowing us to estimate its causal impact on the market. Four years after the start of the program, test scores were 0.2 sd higher in public schools. We find evidence of an education multiplier: test scores in private schools were also 0.2 sd higher in treated markets. Consistent with standard models of product differentiation, the education multiplier is greater for those private schools that faced a greater threat to their market power. Accounting for private sector responses increases the program's cost-effectiveness by 85% and affects how a policymaker would target spending. Given that markets with several public and private schools are now pervasive in low- and middle-income countries, prudent policy requires us to account for private sector responses to public policy, both in their design and in their evaluation. [Funding for this report was provided from the Research on Improving Systems in Education program, funded by UK Aid.]

Using rich panel data from Pakistan, we compute test score based measures of quality (School Value-Addeds or SVAs) for more than 800 schools across 112 villages and verify that they are valid and unbiased. With the SVA measures, we then document three striking features of the schooling environment. First, there is substantial within-village variation in quality. The annualized difference in learning between the best and worst performing school in the same village is 0.4 sd; compounded over 5 years of primary schooling, this difference is similar in size to the test score gap between low- and high-income countries. Second, students learn more in private schools (0.15 sd per year on average), but substantial within-sector variation in quality means that the effects of reallocating students from public to private schools can range from -0.35sd to +0.65sd. Thus, there is a range of possible causal estimates of the private premium, a feature of the environment we illustrate using three different identification approaches. Finally, parents appear to recognize and reward SVA in the private sector, but the link between parental demand and SVA is weaker in the public sector. These results have implications for both the measurement of the private premium and how we design and evaluate policies that reallocate children across schools, such as school closures and vouchers.