The inability of rules- and resource-based reforms to significantly improve academic achievement has forced lawmakers, educators, and parents to look at other means of effecting reform. Instead of manipulating the laws or adding more money, policy-makers are introducing competition into the system by empowering parents with choice. This new dynamic compels schools to either improve or risk going out of business. In a limited manner, incentive-based reforms include public school choice through charter schools and public "schools-of-choice" programs, while more expansive programs include choice among private schools, as well as public schools, through vouchers or tuition tax credits.

Proponents of incentive-based reforms argue that just as businesses respond to heightened levels of competition by making better products, schools will respond to competition by delivering higher-quality education. They believe that assigning children to schools based on where they live is like a business monopoly situation, in which consumers in a particular geographical area can buy a product from only one source. The business/school has no incentive to deliver a quality product because no competitor is pushing it to do so.

Advocates of such reforms suggest that just as consumers improve the products they purchase by exercising their judgment of value in choosing one product over another, parents will be able to improve education by applying their own values and priorities in selecting a school. In this way, schools will be supplied with a needed market incentive that would drive continuous quality improvement.

Recent research indicates that incentive-based reforms have had greater success than changing the rules or increasing resources. For example, Harvard economist Caroline Minter Hoxby has found that areas with greater public school choice have higher student test scores and higher graduation rates, but lower per-student spending.13

In a different study, Hoxby found that competition among private and public schools also benefits public schools. She found that higher rates of private-school enrollment result in higher educational attainment and graduation rates among public-school students and higher teacher salaries among public-school teachers, even after controlling for factors such as area income, family structures, and other variables.14

In 1988, the Mackinac Center for Public Policy embarked on an intensive research and education effort to demonstrate the effectiveness of incentive-based reforms.15 But it wasn' t until the mid-1990s, when charter school and public "schools-of-choice" legislation were adopted in Michigan, that it became possible to measure the impact of competition in education.