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Brookings-Wharton Papers on Urban Affairs 2003 (2003) 139-183



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Public School Finance and Urban School Policy:
General versus Partial Equilibrium Analysis

Thomas Nechyba
Duke University

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THE EFFECTS OF ALTERNATIVE APPROACHES to educational finance on public school quality have attracted substantial attention from researchers and policymakers. Much of this analysis, however, focuses narrowly on the effects of financial resources on school quality in the absence of behavioral adjustments to policy changes. In contrast, this paper examines the relationship between school financing methods and school quality in a framework that explicitly links public finance issues, housing markets, and school quality. In the framework employed here, the quality of a school varies with its financial resources and the quality of students (and their families) that attend the school. Student and family quality in turn depend on both the abilities with which schoolchildren arrive at school as well as the economic status of their parents, who may be able to contribute in other ways to local schools. Households vote for public school spending and pay taxes to support schools, and they may respond to changes in school financing policy by moving or placing their children in private schools. Thus household responses to policy changes not only cover a broad range of options but also interact with the choices of other households, because school quality depends on who else attends local [End Page 139] schools, local housing prices and private school markets reflect overall changes in demand, and local voting on public school spending is affected by all these changes.

Using this framework, this paper focuses on three widely examined policy changes: shifts from local to state financing, changes in state aid formulas, and the introduction of state-funded vouchers. The main finding is that the indirect (general equilibrium) effects of policy changes on school quality—for example, those that arise from households moving and thus alter the quality of neighborhoods and students, or those that arise from parents choosing to shift their students from public to private school or vice versa—tend in many cases to dominate the direct (partial equilibrium) effect on the amount of financial resources devoted to schools. In many ways, this should not be surprising. Public school institutions shape the way many households decide where to live and where to send their children to school, and changes in these institutions alter the fundamental trade-offs faced by families as they make these choices.

This principal finding has several implications for the analysis of educational finance issues. First, urban housing markets and residential mobility play an important role in determining the impact of many school finance policies. Given the strong link between housing markets and access to public schools, an analysis of policy should include an explicit recognition of changes in these markets brought about by household mobility. Second, the existence of private schools, and the extent to which parents are willing and able to shift their students from the public to the private sector, imposes constraints on the impacts of public school policies. In the presence of an active private school market that might respond to changes in public school policies, a focus on only public schools is furthermore incomplete because it ignores the impact of public school policies on a significant number of children. Third, the existence of likely behavioral responses to policies and the link of schools to neighborhoods place severe limits on the extent to which equalizing school financial resources will result in equalizing school quality. This implies that the court-driven focus on spending inequalities may have excessively narrowed policy discussions to only one dimension of a multidimensional problem. Finally, the results in this paper suggest that to the extent they accurately forecast the general equilibrium effects of school finance policies, many households will be more affected by [End Page 140] changes in their wealth (through changes in housing values) from changing school finance policies than through changes in educational opportunities for their children. This adds an important dimension to the political economy analysis of proposals such...

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