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Effect of constraints on Tiebout competition: evidence from a school finance reform in the United States

  • Chakrabarti, Rajashri

    (Federal Reserve Bank of New York)

  • Roy, Joydeep


    (Columbia University and Independent Budget Office)

In 1994, Michigan enacted a comprehensive school finance reform that not only significantly increased state aid to low-spending districts, but also placed restraints on the growth of spending in high-spending districts. While a rich literature studies the impact of school finance reforms on resource equalization, test scores, and residential sorting, there is no literature yet on the impact of such reforms on resource allocation by school districts. This study begins to fill this gap. The Michigan reform affords us a unique opportunity to study the impacts of such reforms on resource allocation in districts located at different points of the pre-reform spending distribution, and we study this both theoretically and empirically. We find that the reform led the high spending districts to allocate a lower share of their total expenditure to support services and a higher share to instruction (relative to the low spending districts). To the extent that instructional expenditures are more productive and contribute to student achievement more than support services expenditures, these results suggest that the reform led to a relative increase in productivity in the high spending districts. This finding is robust in that it continues to hold in each of the seven years after the reform we analyze, is not sensitive to alternative specifications and controls, and survives a series of sensitivity tests. This finding has important policy implications, and this evidence of resource re-allocation by districts facing school finance reforms should be taken into account in the design of any school finance policy.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 471.

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Length: 51 pages
Date of creation: 2010
Date of revision: 01 Apr 2016
Handle: RePEc:fip:fednsr:471
Note: former title: Effect of constraints on Tiebout competition: evidence from the Michigan school finance reform. This is an Accepted Manuscript of an article to be published by Taylor and Francis in Regional Studies (forthcoming).
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  1. Card, David & Payne, A. Abigail, 2002. "School finance reform, the distribution of school spending, and the distribution of student test scores," Journal of Public Economics, Elsevier, vol. 83(1), pages 49-82, January.
  2. T. A. Downes & D. N. Figlio, . "School Finance Reforms, Tax Limits, and Student Performance: Do Reforms Level Up or Dumb Down?," Institute for Research on Poverty Discussion Papers 1142-97, University of Wisconsin Institute for Research on Poverty.
  3. Courant, Paul N & Gramlich, Edward M & Loeb, Susanna, 1995. "Michigan's Recent School Finance Reforms: A Preliminary Report," American Economic Review, American Economic Association, vol. 85(2), pages 372-77, May.
  4. Brunner, Eric & Sonstelie, Jon, 2003. "School finance reform and voluntary fiscal federalism," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2157-2185, September.
  5. Paul N. Courant & Susanna Loeb, 1997. "Centralization of school finance in Michigan," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 16(1), pages 114-136.
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