joint with Eduardo Fajnzylber, submitted.

Public subsidies incentivize private institutions to provide social services; however, incentives can elicit rent extraction activities. This paper studies such phenomena in Chile, where private and public schools receive attendance-based subsidies. Analyzing data from school-reported attendance against unique audit data, we find that pre-K and K12 institutions over-report attendance by approximately 11% and 2.5%, respectively. We identify for-profit motives and low-SES student proportion as significant predictors of over-reporting. Achievement and expenditure data show that low-achievement for-profit institutions over-report for rent extraction purposes. Our results suggest a problematic link between profit motives and public subsidies, resulting in inefficiency in social services.

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