The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

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One of the key questions that naturally arise in discussions of education decentralization is how Federal education resources should be allocated among the various states and within states among communities or schools. In general, there are two approaches: (a) bilateral negotiations between the Federal government and states with little transparency as to the rules; and (b) formula-based distribution. This paper shows that, based on econometric analysis on Federal education transfers data in Mexico, the former approach can lead to allocation results that appear contrary to stated policy objectives like equity improvement and greater social inclusion in education.This paper then argues that contrary to common belief the use of capitation or per student allocation can improve not only efficiency but also equity. In this regard, a theoretical model is presented to analyze this hypothesis. Several variations of the capitation formula are discussed and analysis of the characteristics of the winners and losers of their application are presented, using Mexico as an illustration. World Bank Policy Research Working Paper 3171, December 2003The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent.

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.