Loopholes and the Incidence of Public Services: Evidence From Funding Career and Technical Education
In 2015, Michigan increased its Career and Technical Education (CTE) funding and changed its funding formula to reimburse programs based on student progression through program curricula. Although this change nearly doubled program completion rates, student enrollment and persistence were unaffected; instead, administrators accelerated student progress by reorganizing course curricula around notches in the new funding formula. As a result of response heterogeneity, 30% of the funding increase was transferred away from high-poverty districts to more affluent ones, underscoring how supply-side responses to loopholes shape the incidence of public services.
What is the incidence of public services when there are loopholes in regulatory or accountability policy? While there are many policies that could improve welfare, unintended behavioral responses often undermine policy objectives. For example, public school accountability policies can worsen non-tested outcomes (Dinerstein and Opper 2022) and induce teacher cheating (Jacob and Levitt 2003); health insurance reimbursement regulations can lead to over-diagnoses and upcoding (e.g., Dafny 2005; McClellan 2011); and tax changes can result in avoidance and tax cheating (Slemrod and Yitzhaki 2002; Mortenson and Whitten 2020). Even when policymakers are aware of these behavioral responses, predicting who will respond and with what magnitude can be challenging when supply- and demand-side responses are both possible. In such cases, behavioral responses will determine the incidence of public services as they do in taxation (Rubolino 2023).
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