Estimating permanent and transitory income elasticities of education spending from panel data
We use a twenty-one year panel of data to examine the role of past income and aid, and expectations of future income, in regressions explaining state and local education spending. We show that simple estimates of the elasticity of spending with respect to financial resources are not robust to specification changes because the variables are non-stationary over time, causing inconsistent estimation of model parameters. Estimation in first differences (or equivalently, in growth rates) solves the time-series problems and produces robust estimates of the model's parameters. We then show that current spending by states responds to changes in expected future income. This explains why using fixed effects in simpler models reduces estimated income elasticities; fixed effects partially capture permanent income effects on spending. Estimates of lagged income are significant when used in models that do not explicitly model the expectations process, but present and past aid both have no effect on education spending. Models with structural assumptions about expected income produce estimates very similar to simpler models which include lagged information on income as a control variable. We conclude with recommendations for estimating models when only cross-section data or only short panels are available.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Stock, James H & Watson, Mark W, 1993.
"A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems,"
Econometric Society, vol. 61(4), pages 783-820, July.
- Tom Doan, . "SWDOLS: RATS procedure to estimate cointegrating vectors using dynamic OLS," Statistical Software Components RTS00207, Boston College Department of Economics.
- James H. Stock & Mark W. Watson, 1991. "A simple estimator of cointegrating vectors in higher order integrated systems," Working Paper Series, Macroeconomic Issues 91-3, Federal Reserve Bank of Chicago.
- David E. Wildasin & Thiess Buettner, 2005.
"The Dynamics of Municipal Fiscal Adjustment,"
2005-03, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
- Aronsson, Thomas & Lundberg, Johan & Wikstrom, Magnus, 2000. "The impact of regional public expenditures on the local decision to spend," Regional Science and Urban Economics, Elsevier, vol. 30(2), pages 185-202, March.
- Jing Jin & Heng-fu Zou, 2000.
"How does fiscal decentralization affect aggregate, national, and subnational government size?,"
CEMA Working Papers
72, China Economics and Management Academy, Central University of Finance and Economics.
- Jin, Jing & Zou, Heng-fu, 2002. "How does fiscal decentralization affect aggregate, national, and subnational government size?," Journal of Urban Economics, Elsevier, vol. 52(2), pages 270-293, September.
- Harris, Amy Rehder & Evans, William N. & Schwab, Robert M., 2001. "Education spending in an aging America," Journal of Public Economics, Elsevier, vol. 81(3), pages 449-472, September.
- Murray, Sheila E & Evans, William N & Schwab, Robert M, 1998. "Education-Finance Reform and the Distribution of Education Resources," American Economic Review, American Economic Association, vol. 88(4), pages 789-812, September.
- Michelle T. Bensi & David C. Black & Michael R. Dowd, 2004. "The Education/Growth Relationship: Evidence from Real State Panel Data," Contemporary Economic Policy, Western Economic Association International, vol. 22(2), pages 281-298, 04.
- Reza Baqir, 2002. "Districting and Government Overspending," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1318-1354, December.
- Shadbegian, Ronald J., 1999. "The Effect of Tax and Expenditure Limitations on the Revenue Structure of Local Government, 1962-87," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 221-38, June.
- Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
- Therese A. Mccarty & Stephen J. Schmidt, 2001. "Dynamic Patterns in State Government Finance," Public Finance Review, SAGE Publishing, vol. 29(3), pages 208-222, May.
- Laura S. Connolly, 1999. "Interrelationships among Public Assistance Expenditures: An Empirical Analysis of the Welfare System," Public Finance Review, SAGE Publishing, vol. 27(4), pages 396-417, July.
- Ronald J. Shadbegian, 1999. "Fiscal Federalism, Collusion, and Government Size: Evidence from the States," Public Finance Review, SAGE Publishing, vol. 27(3), pages 262-281, May.
- Goldhaber, Dan, 1999. "An Endogenous Model of Public School Expenditures and Private School Enrollment," Journal of Urban Economics, Elsevier, vol. 46(1), pages 106-128, July.
When requesting a correction, please mention this item's handle: RePEc:eee:pubeco:v:92:y:2008:i:10-11:p:2132-2145. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.