Large-scale Education Reform in General Equilibrium: Regression Discontinuity Evidence from India

The economic consequences of large-scale government investments in education depend on the general equilibrium (GE) effects in both the labor market and the education sector. I develop a general equilibrium model and derive sufficient statistics that capture the consequences of such massive countrywide schooling initiatives. I provide unbiased estimates of the sufficient statistics using a Regression Discontinuity design generated by Indian government policy. The earnings returns to a year of education are 13.4%, and the general equilibrium labor market effects are substantial: they depress the returns to skill by 6.5 percentage points. These GE effects have distributional consequences across cohorts and skill groups, where as a result of the policy, unskilled workers are better off and skilled workers are worse off. In the education sector, more private schools enter these markets negating concerns of crowd-out. JEL: I25, I26, O15, I28