The third category of educational change is incentive-based reform. Until recently, the potential of proper incentives remained untapped by education reformers. However, charter schools and public "schools-of-choice" programs represent the introduction of incentive-based reforms. These measures are the beginning of replacing the "assignment system"whereby children are assigned to a particular government school based on the neighborhood in which they livewith school choice, where parents have the right, freedom, and ability to choose the safest and best schools for their children.
Economics professor James R. Rhinehart and professor of education Jackson F. Lee, Jr. describe the results of a school system where incentives are lacking and the "assignment system" is the norm:
The absence of effective incentives on the part of those who consume and those who produce education explains the poor results we get. The consumers of education, the students and parents, have little power to influence what educators do. This feeling of powerlessness often results in apathy and neglect. The producers of education, on the other hand, have few direct incentives to satisfy students and parents. Educators are not consistently or tangibly rewarded or penalized on the basis of how well their students learn. Instead, they are rewarded on the basis of the number of degrees held, and years of teaching experience. Neither of these factors correlates very well with student achievement or satisfaction.
Educational decisions are largely political, and rest primarily in the hands of the state and local departments of education. Everyone from members of boards of education and superintendents to principals and teachers try to satisfy their superiors. Although educational leaders are often aware of community demands, nowhere are they forced to be responsive to the wishes of their student and parent clients. Educators actively try to influence school board members and state and local politicians because these people have the power to provide pay raises, job security, and better working conditions. Politicians, in turn, appeal to voters and special interest groups in an attempt to get reelected. Students and parents find themselves at the bottom of the hierarchy with little influence and even less clout.
Economists and educators have long identified the inherent problems in the government school system. High costs, lack of choice, low quality, widespread inefficiency, and rampant dissatisfaction are the results of a virtual state monopoly on schooling. These characteristics have been the hallmarks of a highly bureaucratic education system that is unresponsive to the needs and demands of students and parents.
To rectify this undesirable situation, education reformers are increasingly prescribing incentive-based reforms where rules and resources efforts have failed. "What you need is a true competitive situation through the entire industry," said one economist. "All of these efforts at reforming public schools are too little, too late . . . far from sufficient to institute the kind of radical, systemic change that is required."
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.
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.
In August 2000, the Mackinac Center for Public Policy released The Impact of Limited School Choice on Public School Districts, a report that examined how public school districts in Michigan's largest county are responding to competition from charter schools and the public "schools-of-choice" program, which allows students to attend other public schools in their own and neighboring districts. The evidence demonstrates that limited competition among public schools has resulted in a more customer-oriented focus in Michigan districts.
These programs represent incentive-based education reform. Instead of repeating the failed attempts to reform education through new rules or additional resources, these reforms use a market-oriented incentivecompetitionto encourage traditional public schools to improve.
Although only a small percentage of public school students are able to take advantage of these options, competition for students among K-12 government schools has improved educational opportunities for children and encouraged schools to respond to the needs and demands of families. For some districts, making parents happy is not just good public relations anymore; it has come to mean survival and prosperity.
 James R. Rhinehart and Jackson F. Lee, Jr., "Can the Marketplace Save Our Schools?," South Carolina Policy Council Education Foundation, November 1994.
 Peronet Despeignes, "Economists See School Reforms As Key To The `New Economy,'" Investor's Business Daily, 24 September 1997, p. B1.
 Caroline Minter Hoxby. "Does Competition Among Public Schools Benefit Students and Taxpayers?" Working Paper No. 4979, National Bureau of Economic Research, 1994.
 Caroline Minter Hoxby. "Do Private Schools Provide Competition for Public Schools?" Working Paper No. 4978, National Bureau of Economic Research, 1994.