Public School Finance in a General Equilibrium Tiebout World: Equalization Programs, Peer Effects and Private School Vouchers

This paper uses computable general equilibrium simulations to investigate the effect of private school vouchers. It improves on past computational approaches by (i) endogenizing the funding of public schools through the modelling of an explicit political process at the school district level; (ii) embedding the private/public school choice in a Tiebout model in which agents also choose between communities that provide different public school/property tax packages; and (iii) allowing for a variety of different public school financing mechanisms ranging from purely local financing and control all the way to pure state funding. While voucher programs are shown to increase school-based stratification of agents, they tend to decrease residence-based stratification. This implies that untargeted vouchers may be equity-enhancing under some institutional settings even when there are no direct improvements in public school efficiency from increased competition. Furthermore, the effects of targeting vouchers to low income districts may not differ significantly from the effects of untargeted voucher plans.