Good Principals or Good Peers? Parental Valuation of School Characteristics, Tiebout Equilibrium, and the Incentive Effects of Competition among Jurisdictions

School choice policies aim to improve school productivity by rewarding administrators of schools that parents prefer. Parental choice may not create incentives for effective administration if parents prefer schools with desirable peer groups to those with inferior peers but better policies and instruction. I examine families revealed preferences in Tiebout choice residential location markets for evidence on the importance of school effectiveness to parental choices. In a multicommunity-style model, wealthy parents cluster together in any Tiebout equilibrium, and cluster near effective schools if effectiveness is an important component of school desirability. Moreover, decentralization of educational governance choice among several local school districts facilitates this residential sorting. Thus, if parents strongly prefer effective schools, average income correlates with school effectiveness in high-choice-market equilibrium. I use a large sample of SAT-takers to examine the joint distribution of student background and outcomes across schools within metropolitan housing markets that differ in the structure of educational governance. I find strong evidence that choice facilitates residential sorting, but little evidence of the sorting that is predicted if parents choose neighborhoods for school characteristics other than peer groups. Moreover, average SAT scores are no higher in high-choice than in low-choice markets. These results suggest caution about the potential to induce improvements in educational productivity through expansions of parental choice.