This paper studies the effects of school reform in Chile, which adopted a nationwide school voucher program along with school decentralization reforms in 1981. Since then, Chile has had a relatively unregulated, competitive market in primary and secondary education. It therefore provides a unique setting in which to study how these reforms affected school attainment and labor market outcomes. This paper develops and estimates a dynamic model of school attendance and work decisions using panel data from the 2002 and 2004 waves of the Encuesta de Protección Social survey. Some individuals in the sample completed their schooling before the voucher reforms were introduced, while others had the option of using the vouchers over part or all of their schooling careers. The impacts of the voucher reform are identified from differences in the schooling and work choices made and earnings returns received by similar aged individuals who were differentially exposed to the voucher system. Simulations based on the estimated model show that the voucher reform significantly increased the demand for private subsidized schools and decreased the demand for both public and nonsubsidized private schools. It increased high school (grades 9–12) graduation rates by 3.6 percentage points and the percentage completing at least two years of college by 2.6 percentage points. Individuals from poor and non-poor backgrounds on average experienced similar schooling attainment gains. The reform also increased lifetime utility and modestly reduced earnings inequality.

Keywords. School vouchers, dynamic schooling model, human capital production.

JEL classification. I21, I22, I28, J22, J24.