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Is There an Equity-Efficiency Trade-Off in School Finance? Tiebout and a Theory of the Local Public Goods Producer

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  • Caroline M. Hoxby

Abstract

New empirical work shows the degree of competition among public providers of local public goods or between public and private providers of local public goods matters. This evidence needs a theory of the local public goods producer. Tiebout's hypothesis spawned a literature that gives local public economics a useful theory of the consumer which can generate a theory of the local public goods producer. This potential has remained largely undeveloped apart from Tiebout's vision of the local public goods producer as an entrepreneur, which is unrealistic because local public goods are nonverifiable. The Tiebout mechanism does not operate in alternative models of the local public goods producer, such as bureaucracy and agenda models. None of these models is useful for predicting how local public goods producers react to policies that change the structure of local public finance. This paper builds a theory of the producer that draws upon Tiebout's mechanism and the theory of incentives for regulation. I find that Tiebout's mechanism generates information that can be used in regulatory schemes to achieve lower costs for any given provision of local public goods. Thus, we face a fundamental trade-off between promoting equitable consumption of the public good and promoting efficiency in production of the public good. This trade-off exists even when equity in consumption generates positive externalities, as is often suggested of the consumption of schooling. I present evidence that when the Tiebout mechanism for schools is weakened by state-level school funding, per-pupil costs rise and the growth of educational attainment falls. This implies that losses from inefficient production generally outweigh gains from equalized consumption.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5265.

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Date of creation: Sep 1995
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Publication status: published as Journal of Public Economics (1999).
Handle: RePEc:nbr:nberwo:5265

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  1. Thomas Romer & Howard Rosenthal, 1978. "Political resource allocation, controlled agendas, and the status quo," Public Choice, Springer, vol. 33(4), pages 27-43, December.
  2. Raquel Fernandez & Richard Rogerson, 1994. "On the political economy of education subsidies," Staff Report 185, Federal Reserve Bank of Minneapolis.
  3. Epple, Dennis & Filimon, Radu & Romer, Thomas, 1984. "Equilibrium among local jurisdictions: toward an integrated treatment of voting and residential choice," Journal of Public Economics, Elsevier, vol. 24(3), pages 281-308, August.
  4. Roland Benabou, 1991. "Workings of a City: Location, Education, and Production," NBER Technical Working Papers 0113, National Bureau of Economic Research, Inc.
  5. Epple, Dennis & Zelenitz, Allan, 1981. "The Implications of Competition among Jurisdictions: Does Tiebout Need Politics?," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1197-1217, December.
  6. Borland, Melvin V. & Howsen, Roy M, 1992. "Student academic achievement and the degree of market concentration in education," Economics of Education Review, Elsevier, vol. 11(1), pages 31-39, March.
  7. Sam Peltzman, 1994. "Political Economy of Public Education: Non-college-bound Students," University of Chicago - George G. Stigler Center for Study of Economy and State 108, Chicago - Center for Study of Economy and State.
  8. Eberts, Randall W. & Gronberg, Timothy J., 1981. "Jurisdictional homogeneity and the Tiebout hypothesis," Journal of Urban Economics, Elsevier, vol. 10(2), pages 227-239, September.
  9. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
  10. Caroline M. Hoxby, 2000. "Does Competition among Public Schools Benefit Students and Taxpayers?," American Economic Review, American Economic Association, vol. 90(5), pages 1209-1238, December.
  11. Rubinfeld, Daniel L., 1987. "The economics of the local public sector," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 11, pages 571-645 Elsevier.
  12. Epple, Dennis & Romano, Richard E, 1998. "Competition between Private and Public Schools, Vouchers, and Peer-Group Effects," American Economic Review, American Economic Association, vol. 88(1), pages 33-62, March.
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Cited by:
  1. Dennis N. Epple & Richard Romano, 2003. "Neighborhood Schools, Choice, and the Distribution of Educational Benefits," NBER Chapters, in: The Economics of School Choice, pages 227-286 National Bureau of Economic Research, Inc.
  2. repec:fth:prinin:389 is not listed on IDEAS
  3. Pablo Gonz�lez, 2002. "Lecciones de la investigaci�n econ�mica sobre el rol del sector privado en educaci�n," Documentos de Trabajo 117, Centro de Economía Aplicada, Universidad de Chile.
  4. Geoffrey Rapp, 2000. "Agency and Choice in Education: Does school choice enhance the work effort of teachers?," Education Economics, Taylor & Francis Journals, vol. 8(1), pages 37-63.
  5. Robert P. Inman, 1997. "Editor's introduction," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 16(1), pages 1-9.
  6. Victor R. Fuchs & Alan B. Krueger & James M. Poterba, 1997. "Why do Economists Disagree About Policy?," NBER Working Papers 6151, National Bureau of Economic Research, Inc.
  7. Caroline Minter Hoxby, 1996. "Are Efficiency and Equity in School Finance Substitutes or Complements?," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 51-72, Fall.

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