Byline: Gilberto Turati, Daniel Montolio, Massimiliano Piacenza Keywords: fiscal decentralisation; market incentives; public and private schools; subnational government accountability; H75; I22 Abstract We discuss the issue of how schools should be financed, concentrating on the role of private funding and public funding via subnational governments as accountability mechanisms in the provision of educational services. The historical evolution of school regulation in Italy and Spain has created differences in the percentage of pupils who attend private schools, the percentage of private school funding coming from public and private sources and the percentage of public school funding that comes from central or local government sources. We take advantage of these institutional diversities rooted in history to estimate the disciplining role of these different sources of funding in the context of an educational production function using Programme for International Student Assessment (PISA) data. Our results provide support to both accountability mechanisms and point to the presence of an important interplay between them. Article Note: Submitted July 2013. We wish to thank the Editor, Claire Crawford, for the extremely valuable comments on the identification strategy and the overall structure of the paper. For discussion and comments, we also thank Luigi Benfratello, Massimo Bordignon, Vani Borooah, Pierre Brochu, Daniele Checchi, Enrico Colombatto, JosAaAaAeA@ Manuel Cordero, Elena Del Rey, Alexander Libman, E MAaAaAeA rk, Veruska Oppedisano, Jorn Rattso, Yvon Rocaboy, Katja Rost, Albe SolAaAaAeA@-OllAaAaAeA@, Fabio Padovano, Ilaria Petrarca, Stanley Winer and particip at the XXIV Conference of the Italian Public Economics Society (Pavia, 2012), the 68.sub.th Annual Conference of the International Institute of Public Finance (Dresden, 2012), the Condorcet Center Seminar (Rennes, 2012), the 2.sub.nd World Congress of the Public Choice Societies (Miami, 2012), the 4.sub.th NERI Workshop (University of Torino, 2012), the XIX Encuentro de EconomAaAaAeA a PAaAaAeA blica (University of Santiago de Compost 2012) and the ERSA 2011 Congress (University of Barcelona). The paper was funded by the 'IEB Research Grant on Fiscal Federalism 2010'. G. Turati acknowledges the kind hospitality during his stay at the IEB in May and November 2010, when this project was initiated. D. Montolio acknowledges support from grant 2009SGR102 and 2014SGR420 (Generalitat de Catalunya). Usual disclaimers apply.