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Capitalization of Parent, School, and Peer Group Components of School Quality into House Price

We decompose school proficiency test scores into their parent, peer group, and school input components to see which are valued by the housing market. The value-added model proposes that only locationally fixed district-specific factors such as inputs to schooling and the characteristics of student peers are capitalized into house prices. This model claims that portable inputs to student outcomes, such as parental contributions, are not capitalized. A competing model argues that value-added is not easily observed; rather, educational outcomes such as proficiency test scores are easily observed and are capitalized into house prices. Based on our study of 123 school districts and 27,000 house transactions, we find little support for the value-added model. Instead, we find that households value a district’s average proficiency test scores. The primary component of the proficiency test score that is capitalized into house prices is the parental input component. The peer group component is also valued, but less strongly. The school input component is not valued.

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Paper provided by Department of Economics, Louisiana State University in its series Departmental Working Papers with number 2005-04.

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Handle: RePEc:lsu:lsuwpp:2005-04
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