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.
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.:
- 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.
- Thiess Buettner & David E. Wildasin, 2002.
"The Dynamics of Municipal Fiscal Adjustment,"
CESifo Working Paper Series
649, CESifo Group Munich.
- Thiess Buettner & David E. Wildasin, 2003. "The Dynamics of Municipal Fiscal Adjustment," Public Economics 0309007, EconWPA.
- David E. Wildasin & Thiess Buettner, 2005. "The Dynamics of Municipal Fiscal Adjustment," Working Papers 2005-03, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
- 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.
- 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.
- 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, "undated". "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.
- repec:ntj:journl:v:52:y:1999:i:n._2:p:221-38 is not listed on IDEAS
- 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.
- 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.
- 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(2), pages 221-238, June.
- 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.
- 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.
- 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.
- Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, 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.
- Reza Baqir, 2002. "Districting and Government Overspending," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1318-1354, December.
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: (Dana Niculescu)
If references are entirely missing, you can add them using this form.