This paper investigates a channel through which government and institutions affect educational system using PISA dataset. Fixed effects model is utilized. Educational production functions are set for each proxy for institutional quality such as democracy, governance effectiveness, and control of corruption. Interaction term between some of school factors and institutional factors are included to investigate indirect influence of government and institutions on educational system. This study finds that financial support from government and school autonomy over budget related decisions are the channel factors that this paper tries to investigate. According to the results, letting government have more power on deciding educational contents related policies acts as a positive role on students’ performance, regardless of the level of institutions. However, implication in the case of financial problem is opposite. As the level of democracy and effective governance of societies increase, allowing schools to have autonomy to formulate school budget and decide the usage of it is better for the quality of education than concentrating budget decision power on government.