Introducing school accountability may create incentives for e¢ ciency. However, if the performance measure used does not correct for pupil characteristics, it will lead to an inequitable treatment of schools and create perverse incentives for cream-skimming. We apply the theory of fair allocation to show how to integrate empirical information about the educational production function in a coherent theoretical framework. The requirements of rewarding performance and correcting for pupil characteristics are incompatible if we want the funding scheme to be applicable for all educational production functions. However, we characterize an attractive subsidy scheme under speci
c restrictions on the educational production function. This subsidy scheme uses only information which can be controlled easily by the regulator. We show with Flemish data how the proposed funding scheme can be implemented. Correcting for pupil characteristics has a strong impact on the subsidies (and on the underlying performance ranking) of schools. We would like to thank Dirk Van de gaer, Carine Van de Voorde and Geert Dhaene for their useful comments, Ides Nicaise and Jan Van Damme for their permission to use the SiBO-data, and Frederik Maes and Peter Helsen for their valuable help with these data. The paper presents results of the Belgian Program on Interuniversity Poles of Attraction initiated by the Belgian State, Prime Ministers O¢ ce, Science Policy Programming. The scienti
c responsibility is assumed by the authors. yErwin Ooghe: Department of Economics, KULeuven, email@example.com. Erik Schokkaert: CORE, Université catholique de Louvain and Department of Economics, KULeuven, firstname.lastname@example.org.
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