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Capitalising the Value of Free Schools: The Impact of Supply Constraints and Uncertainty

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  • Paul Cheshire

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  • Stephen Sheppard

    ()

Abstract

There has been a growing literature in both the US (for example Haurin and Brasington 1996, and Black 1999) and the UK (for example Gibbons & Machin, 2001) that estimates the way in which school quality is capitalised into house prices. Cheshire and Sheppard 1995 and 1999 have estimated hedonic models in which the quality of the secondary school to which a household was assigned was a significant variable. This provided evidence that the value of secondary school quality was being capitalised into the price of houses. In contrast Gibbons and Machin concluded that primary schools had an identifiable and significant price associated with their quality but that secondary schools did not. Their study did not have data for individual houses but used post-code sector data and then various techniques to standardised for all but one variable: either the notional primary school catchment area or the notional secondary school catchment area. Each of these analyses is predicated on the assumption that the value of local schools should be reflected in the value of houses. We expect variation in the capitalised price of a given school quality at either primary or secondary level according to the elasticity of supply of ‘school quality’ in the local market. This will vary systematically between and perhaps within cities and this paper explores the sources and the impact of such variations as well as the impact of model specification. Using an hedonic model and data from 1999-2000, we estimate values attached to both secondary school and primary school quality. The results support the conclusion that both secondary and primary school quality is capitalised into the market price of houses and that the capitalisation of school quality is discounted within the context of an urban area that is tightly constrained by land use planning in areas where new construction is concentrated. We also find evidence that appropriate model specification is imperative since bias is evident both when key neighbourhood characteristics are omitted and if the actual allocation of addresses to schools is not included. JEL: D12; H4; I2; R5

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Bibliographic Info

Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa03p8.

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Date of creation: Aug 2003
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Handle: RePEc:wiw:wiwrsa:ersa03p8

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  1. Brueckner, Jan K. & Thisse, Jacques-Francois & Zenou, Yves, 1999. "Why is central Paris rich and downtown Detroit poor?: An amenity-based theory," European Economic Review, Elsevier, vol. 43(1), pages 91-107, January.
  2. Sandra E. Black, 1997. "Do better schools matter? Parental valuation of elementary education," Research Paper 9729, Federal Reserve Bank of New York.
  3. Steve Gibbons & Stephen Machin, 2001. "Valuing Primary Schools," CEE Discussion Papers 0015, Centre for the Economics of Education, LSE.
  4. Cheshire, Paul & Sheppard, Stephen, 1998. "Estimating the Demand for Housing, Land, and Neighbourhood Characteristics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 60(3), pages 357-82, August.
  5. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
  6. Brasington, David M., 2002. "Edge versus center: finding common ground in the capitalization debate," Journal of Urban Economics, Elsevier, vol. 52(3), pages 524-541, November.
  7. Haurin, Donald R. & Brasington, David, 1996. "School Quality and Real House Prices: Inter- and Intrametropolitan Effects," Journal of Housing Economics, Elsevier, vol. 5(4), pages 351-368, December.
  8. Christian A. L. Hilber & Christopher J. Mayer, . "Land Supply, House Price Capitalization, and Local Spending on Schools," Zell/Lurie Center Working Papers 392, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
  9. Cheshire, Paul & Sheppard, Stephen, 1995. "On the Price of Land and the Value of Amenities," Economica, London School of Economics and Political Science, vol. 62(246), pages 247-67, May.
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Cited by:
  1. Gibbons, Steve & Machin, Stephen & Silva, Olmo, 2006. "Choice, Competition and Pupil Achievement," IZA Discussion Papers 2214, Institute for the Study of Labor (IZA).
  2. Arnab Bhattacharjee & Chris Jensen-Butler, 2011. "Estimation of the Spatial Weights Matrix under Structural Constraints," Dundee Discussion Papers in Economics 254, Economic Studies, University of Dundee.
  3. Arnab Bhattacharjee & Chris Jensen-Butler, 2005. "A Model of Regional Housing Markets in England and Wales," CRIEFF Discussion Papers 0508, Centre for Research into Industry, Enterprise, Finance and the Firm.
  4. Oliver Himmler, 2009. "The Effects of School Competition on Academic Achievement and Grading Standards," CESifo Working Paper Series 2676, CESifo Group Munich.
  5. Arnab Bhattacharjee & Chris Jensen-Butler, 2005. "Estimation of Spatial Weights Matrix in a Spatial Error Model, with an Application to Diffusion in Housing Demand," CRIEFF Discussion Papers 0519, Centre for Research into Industry, Enterprise, Finance and the Firm.

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