School Finance, Spatial Income Segregation and the Nature of Communities

While the issue of school finance has been studied extensively, relatively little effort has been devoted to understanding how school finance policies impact the nature of communities. This is peculiar in light of substantial evidence that public school quality, at least in the U.S., has much to do with residential choices by households, and in light of increasing empirical evidence that residential segregation perpetuates income inequality. In this paper, I emphasize in particular the importance of considering not only the level of government that is funding public schools but also the role played by the private sector as well as its interaction with the existing public school system. Somewhat surprisingly, simulation results based on U.S. data suggest that, in terms of producing spatial income segregation, the role of centralization versus decentralization of public school financing is quite secondary to the role played by the private sector. A purely public school system, regardless of the degree of centralization of school finance, results in substantially more spatial segregation than a purely private system. However, it is the combination of a (centralized or decentralized) public system with a private school market that yields the least residential segregation as housing price distortions from the capitalization of the public system generate incentives for middle and high income private school attendees to live with lower income public school attendees. Motivated by this insight, additional simulations involving explicit government support for private schools in the form of vouchers are reported, and the sensitivity of results to alternative school production models is tested.