The structure of educational costs: Multiproduct cost functions for primary and secondary schools in latin America

This paper extends the existing literature on educational cost functions in the following ways: it employs flexible cost functions to comply with prior theoretical expectations about price homogeneity without the imposition of overly restrictive assumptions regarding the technological structure; it examines possible complementarities in the provision of different levels of schooling by treating schools as multiproduct firms: and it uses disaggregated school-level data for two developing countries. The major findings are: (a) the data for the Paraguayan and Bolivan samples indicate that the average primary school does exhibit scale economies with respect to percentage changes in quality-adjusted enrollment, with the level of secondary student outputs held fixed. The same finding holds for the average Bolivian secondary school, with the provision of primary levels held fixed. The results are not substantially affected when students' transport costs are taken into account; (b) at least for this sample, there do not appear to be any significant complementarities that imply lower costs for schools which offer both primary and secondary services vs those which offer only one or the other; (c) there is some scope to substitute between labor and non-labor inputs, even in the short run, particularly for the Bolivian sample. Thus, in the event of a major escalation in teacher salaries, schools may be able to absorb some of the increase by substituting teachers for materials (such as hooks and supplies) to maintain the same level of output in terms of quantity and quality: and (d) there is some evidence for Paraguay that the size of the physical plant for schools is excessive. This overinvestment would imply that long-run cost minimization should not simply be assumed in cost function studies.