Housing Disease and Public School Finances
Median expenditure per student in U.S. public schools grew 41% in real terms from 1990 to 2009. We propose a new mechanism to explain part of this increase: housing disease, a fiscal externality from local housing markets in which unexpected booms generate extra revenues that schools administrators have incentives to spend, independent of local preferences for provision of public goods. We establish the importance of housing disease by: (i) assembling a novel microdata set containing the universe of housing transactions for a large sample of school districts; and (ii) using the timelines of school district housing booms to disentangle the effects of housing disease from reverse causality and changes in household composition. We estimate housing price elasticities of per-pupil expenditures of 0.16-0.20, which accounts for approximately half of the rise in public school spending. School districts did not boost administrative costs with those additional funds. Instead, they primarily increased spending on instruction and capital projects, suggesting that the cost increase was accompanied by improvements in the quality of school inputs.
We thank the Research Sponsors Program of the Zell/Lurie Real Estate Center at Wharton for financial support. We are grateful to Qize Chen, Stella Yeayeun Park, and Xuequan Peng for providing research assistance. We also would like to thank Moshe Buchinsky, Steven Craig, Caroline Hoxby, Bob Inman, Till Von Wachter, and the seminar participants at University of Houston, UCLA, Insper, and the NBER Economics of Education meeting for valuable comments and suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
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