Using Market Valuation to Assess the Importance and Efficiency of Public School Spending

In this paper we take a “market-based” approach to examine whether increased school expenditures are valued by potential residents and whether the current level of public school provision is inefficient. We do so by employing an instrumental variables strategy to estimate the effect of state education aid on residential property values. We find evidence that, on average, additional state aid is valued by potential residents and that school districts appear to spend efficiently or, if anything, underspend. We also find that school districts spend less efficiently in areas in which they face little or no competition from other public schools, in large districts, and in areas in which residents are poor or less educated. One interpretation of these results is that increased competition has the potential to increase school efficiency in some areas.