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Capitalising the Value of Free Schools: The Impact of Supply Characteristics and Uncertainty

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There has been a growing literature in both the US (for example Haurin and Brasington 1996, and Black 1999) and the UK (for example Gibbons & Machin, 2003) that estimates the way in which school quality is capitalised into house prices. Cheshire and Sheppard 1995 and 1999 estimated hedonic models in which the quality of the secondary school to which a household was assigned was a significant variable which provided evidence that secondary school quality was being capitalised into the price of houses. In contrast Gibbons and Machin concluded that primary schools were more significant. Each of these analyses is predicated on the assumption that the value of local schools should be reflected in the value of houses. We argue here that this is rather too simple. We should expect variation in the capitalised price of a given school quality at either primary or secondary level according to the elasticity of supply of 'school quality' in the local market, the certainty with which that quality can be expected to be maintained over time and the suitability of the dwelling to accommodate children. These factors will vary systematically between and perhaps within cities. This paper explores the sources and the impact of such variations as well as the impact of model specification. The results provide new evidence on the complex and subtle ways in which housing markets capitalise the value of local public goods such as school quality and perhaps most importantly suggest that this is highly non-linear: houses in the catchment areas of only the best state schools command substantial premiums but such capitalised values can be very substantial indeed.

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  • Paul Cheshire & Stephen Sheppard, 2004. "Capitalising the Value of Free Schools: The Impact of Supply Characteristics and Uncertainty," Department of Economics Working Papers 2004-17, Department of Economics, Williams College.
  • Handle: RePEc:wil:wileco:2004-17
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    1. Sandra E. Black, 1999. "Do Better Schools Matter? Parental Valuation of Elementary Education," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(2), pages 577-599.
    2. Haurin, Donald R. & Brasington, David, 1996. "School Quality and Real House Prices: Inter- and Intrametropolitan Effects," Journal of Housing Economics, Elsevier, vol. 5(4), pages 351-368, December.
    3. Brueckner, Jan K. & Thisse, Jacques-Francois & Zenou, Yves, 1999. "Why is central Paris rich and downtown Detroit poor?: An amenity-based theory," European Economic Review, Elsevier, vol. 43(1), pages 91-107, January.
    4. Hilber, Christian A.L. & Mayer, Christopher, 2009. "Why do households without children support local public schools? Linking house price capitalization to school spending," Journal of Urban Economics, Elsevier, vol. 65(1), pages 74-90, January.
    5. Oates, Wallace E, 1969. "The Effects of Property Taxes and Local Public Spending on Property Values: An Empirical Study of Tax Capitalization and the Tiebout Hypothesis," Journal of Political Economy, University of Chicago Press, vol. 77(6), pages 957-971, Nov./Dec..
    6. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64(5), pages 416-416.
    7. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
    8. Cheshire, Paul & Sheppard, Stephen, 1995. "On the Price of Land and the Value of Amenities," Economica, London School of Economics and Political Science, vol. 62(246), pages 247-267, May.
    9. Cheshire, Paul & Sheppard, Stephen, 1998. "Estimating the Demand for Housing, Land, and Neighbourhood Characteristics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 60(3), pages 357-382, August.
    10. Dennis Leech & Erick Campos, 2003. "Is comprehensive education really free?: a case‐study of the effects of secondary school admissions policies on house prices in one local area," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 166(1), pages 135-154, February.
    11. Gibbons, Steve & Machin, Stephen, 2003. "Valuing English primary schools," Journal of Urban Economics, Elsevier, vol. 53(2), pages 197-219, March.
    12. Christian A. L. Hilber & Christopher J. Mayer, 2004. "Why Do Households Without Children Support Local Public Schools?," NBER Working Papers 10804, National Bureau of Economic Research, Inc.
    13. Brasington, David M., 2002. "Edge versus center: finding common ground in the capitalization debate," Journal of Urban Economics, Elsevier, vol. 52(3), pages 524-541, November.
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    More about this item

    Keywords

    House values; hedonic models; public schools;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • H4 - Public Economics - - Publicly Provided Goods
    • I2 - Health, Education, and Welfare - - Education
    • R5 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis

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