As shown above, small school students differ from their prior
classmates along observable characteristics. One approach to measure
the relationship between small school attendance and student
outcomes would be to condition on these observable characteristics
such as special education status, race and gender. We model
this approach as follows:
where Y is an outcome measure, such as standardized test score or
dropout status, for student i at time T in cohort y in school s. X is a
vector of student characteristics such as race, gender and free-lunch
status, SM is an indicator variable for whether a student is enrolled
in a small school in grade 9, c is a cohort fixed effect (that is, a
dummy variable for the year in which the cohort enters 9th grade),
and e is an individual error term that includes a component that
allows for correlations across students in the same school. We augment
the equation to include fixed effects g for 8th grade school
units, or fixed effects u for a student’s home ZIP code, or both.
This approach adjusts for selection into small schools as reflected
by demographic characteristics.
However, Eq. (1) ignores potentially important unobserved
characteristics that may be correlated with both the outcome
and the decision to enroll in a small school. Failure to control for
these characteristics would bias the measured impact of small
schools. Thus, one can additionally control for a baseline test score
T, such that:
This strategy works under the (likely untenable) assumption
that the baseline test score adequately captures all of the other
unobserved characteristics that affect both the student outcome
and whether a student enrolls in a small school. In effect, Eq. (2)
compares two children who have the same prior test score and
share the same demographic characteristics, but one is enrolled
in a small school and the other is enrolled in a regular school. A
positive coefficient on a1 (for an outcome such as a test score)
would indicate that the test score gain (or value-added) is larger
for a student who attends a small school.