Mechanisms Underlying Choice-Set Formation: The Case of School Choice in Chile

Many decisions involve selecting among many more options than an individual can effectively examine and consider. Therefore, people usually consider smaller and different “choice sets” as viable options. To better understand the processes affecting choice-set formation, we developed a computational model of how households become aware of potential choices in a context for which understanding household decision-making has important public policy implications: market-based reforms in education. In the model, households learn about the schools to which they can send their children through three mechanisms: find out about geographically proximate schools, access to publicly available information, and information gathered from interactions with other households. We calibrated the model using data from four cities in Chile, where students are not required to attend their neighborhood school. We then used the model to conduct hypothetical computational experiments that assessed how each mechanism impacted the sets of schools known to households before they make their choice (their “awareness set”). We found that the inclusion of a social interaction mechanism was crucial for producing simulated awareness sets that matched the awareness sets provided in a survey conducted by the Chilean Ministry of Education. We also found that the social interaction mechanism played the largest role in determining the quality and price range of the choices available in households’ awareness sets. Our findings highlight the importance of social interactions in a stage of decision-making before the direct impact of other individuals is typically made explicit. Moreover, it validates an approach that can be used in future models where understanding how decision-makers become aware of their options may be as important as the way they choose among them.