The Productivity of Schools and Other Local Public Goods Providers

I construct an agency model of local public goods producers with special reference to public schools. The model assumes that households make Tiebout choices among jurisdictions, but it has more realistic assumptions about information and the cost of residential mobility. I examine producers' effort and rent under local property tax finance and centralized finance. I show that, if there are a sufficient number of jurisdictions to choose among, conventional local property tax finance substantially reduces the agency problem and associated loss of productivity. Specifically, I demonstrate that local property tax finance can attain about as much productivity as a social planner with centralized finance can, even if the social planner is armed with more information that a real social planner could plausibly have. The key insight is that decentralized Tiebout choices make some information the social planner would need verifiable and other information unnecessary.

The Cost of Accountability

Discussions of school accountability focus on two issues: poor test administration and the expense of accountability. Up to this point, researchers have focused on test quality and simply assumed that the programs are expensive enough to crowd out other policies, such as class size reduction or higher teacher salaries. Researchers have also assumed that it is so expensive to have a good accountability program (which includes good comprehensive tests, well-defined standards, an effective report card system, and safeguards that prevent cheating and teaching the test) that only poor accountability systems will be affordable. In this paper, I present the facts about how much accountability costs. The facts are, fortunately, highly knowable because costs show up both as expenditures on government budgets and as revenues on companies' (mainly test makers') accounts. Moreover, it turns out that worrying about measurement error in the cost data is pointless. The costs of accountability programs are so tiny that even the most generous accounting could not make them appear large, relative to the cost of other education programs. The 'most expensive' programs in the United States generally cost less than one quarter of 1 percent of per pupil spending, and most of these are only as costly as they are because a state is in the 'expensive' and temporary phase of developing its own comprehensive tests.

Is There an Equity-Efficiency Trade-Off in School Finance? Tiebout and a Theory of the Local Public Goods Producer

New empirical work shows the degree of competition among public providers of local public goods or between public and private providers of local public goods matters. This evidence needs a theory of the local public goods producer. Tiebout's hypothesis spawned a literature that gives local public economics a useful theory of the consumer which can generate a theory of the local public goods producer. This potential has remained largely undeveloped apart from Tiebout's vision of the local public goods producer as an entrepreneur, which is unrealistic because local public goods are nonverifiable. The Tiebout mechanism does not operate in alternative models of the local public goods producer, such as bureaucracy and agenda models. None of these models is useful for predicting how local public goods producers react to policies that change the structure of local public finance. This paper builds a theory of the producer that draws upon Tiebout's mechanism and the theory of incentives for regulation. I find that Tiebout's mechanism generates information that can be used in regulatory schemes to achieve lower costs for any given provision of local public goods. Thus, we face a fundamental trade-off between promoting equitable consumption of the public good and promoting efficiency in production of the public good. This trade-off exists even when equity in consumption generates positive externalities, as is often suggested of the consumption of schooling. I present evidence that when the Tiebout mechanism for schools is weakened by state-level school funding, per-pupil costs rise and the growth of educational attainment falls. This implies that losses from inefficient production generally outweigh gains from equalized consumption.

Competition Among Public Schools: A Reply to Rothstein (2004)

Rothstein has produced two comments, Rothstein (2003) and Rothstein (2004), on Hoxby "Does Competition Among Public Schools Benefit Students and Taxpayers," American Economic Review, 2000. In this paper, I discuss every claim of any importance in the comments. I show that every claim is wrong. I also discuss a number of Rothstein's innuendos--that is, claims that are made by implication rather than with the support of explicit arguments or evidence. I show that, when held up against the evidence, each innuendo proves to be false. One of the major points of Rothstein (2003) is that lagged school districts are a valid instrumental variable for today's school districts. This is not credible. Another major claim of Rothstein (2003) is that it is better to use highly non-representative achievement data based on students' self-selecting into test-taking than to use nationally representative achievement data. This claim is wrong for multiple reasons. The most important claim of Rothstein (2004) is that the results of Hoxby (2000) are not robust to including private school students in the sample. This is incorrect. While Rothstein appears merely to be adding private school students to the data, he actually substitutes error-prone data for error-free data on all students, generating substantial attenuation bias. He attributes the change in estimates to the addition of the private school students, but I show that the change in estimates is actually due to his using erroneous data for public school students. Another important claim in Rothstein (2004) that the results in Hoxby (2000) are not robust to associating streams with the metropolitan areas through which they flow rather than the metropolitan areas where they have their source. This is false: the results are virtually unchanged when the association is shifted from source to flow. Since 93.5 percent of streams flow only in the metropolitan area where they have their source, it would be surprising if the results did change much. The comments Rothstein (2003) and Rothstein (2004) are without merit. All of the data and code used in Hoxby (2000) are available to other researchers. An easy-to-use CD provides not only extracts and estimation code, but all of the raw data and the code for constructing the dataset.

Informing Students about Their College Options: A Proposal for Broadening the Expanding College Opportunities Project

Most high-achieving, low-income students do not even apply to selective colleges despite being highly qualified for admission and success at these institutions. Because they do not apply, these students forgo the generous academic resources, increased financial aid, and better collegiate and career opportunities that selective schools offer. To increase opportunities and improve outcomes for these students, we propose building on the success of an innovative intervention, the Expanding College Opportunities (ECO) Project. At a relatively low cost of about $6 per student contacted, ECO sent the following to high-achieving, low-income students: targeted and personalized information on their college options, information on the process for applying, and details of the financial information relevant to their situations. The intervention had a profound effect on their college application behavior, leading to a substantial increase in their propensity to apply to more-selective colleges commensurate with their academic achievements. Not only did students apply to more-selective schools, but they were accepted and matriculated at such schools in greater numbers, and early evidence points to their academic success in these programs. The promising results of this low-cost program suggest that ECO should be expanded. This paper proposes steps to expand and improve ECO to reach more low-income, high-achieving students across the country by partnering with respected third-party organizations such as the College Board and ACT. ECO can also serve as a model for designing and applying this type of intervention to other populations of students. The success of the ECO Project highlights the importance of researchers being able to access relevant government data to design targeted and effective programs and polici

Do and Should Financial Aid Packages Affect Students' College Choices?

Every year, thousands of high school seniors with high college aptitude face complicated menus' of scholarship and aid packages designed to affect their college choices. Using an original survey designed for this paper, we investigate whether students respond to their menus' like rational human capital investors. Whether they make the investments efficiently is important not only because they are the equivalent of the Fortune 500' for human capital, but also because they are likely to be the most analytic and long-sighted student investors. We find that the typical high aptitude student chooses his college and responds to aid in a manner that is broadly consistent with rational investment. However, we also find some serious anomalies: excessive response to loans and work-study, strong response to superficial aspects of a grant (such as whether it has a name), and response to a grant's share of college costs rather than its amount. Approximately 30 percent of high aptitude students respond to aid in a way that apparently reduces their lifetime present value. While both a lack of sophistication/information and credit constraints can explain the behavior of this 30 percent of students, the weight of the evidence favors a lack of sophistication.

Robin Hood and His Not-So-Merry Plan: Capitalization and the Self-Destruction of Texas' School Finance Equalization Plan

School finance schemes control the allocation of $370 billion a year in the United States, but their economics are poorly understood. We examine an illuminating example: Texas' Robin Hood' scheme, which was enacted in 1994, allocates about$30 billion a year, and is currently collapsing and likely to be abandoned. We show that the collapse was predictable. Robin Hood's design causes substantial negative capitalization, shrinking its own tax base. It relies only slightly on relatively efficient (pseudo lump sum) redistibution and heavily on high marginal tax rates. Although Robin Hood reduced the spending gap between Texas' property-poor and property-rich districts by $500 per pupil, it destroyed about$27,000 per pupil in property wealth. The magnitude of this loss is important: if the state had efficiently confiscated the same wealth and invested it, it would generate sufficient annual income to make all Texas schools spend at a high leval. The Robin Hood scheme is stringent but not bizarre: other states' systdms share its features to some degree. We provide estimates of the effects of school finance system parameters, which policy makers could use to design systems that are more efficient and stable.

Benevolent Colluders? The Effects of Antitrust Action on College Financial Aid and Tuition

The Department of Justice's (DOJ's) investigation of private colleges for price-fixing caused the Overlap' group of colleges to discontinue their meetings. DOJ alleged that the meetings enabled the colleges to collude on higher tuition and increase their tuition revenue. The colleges claimed that they needed the meeting to implement their policies of basing aid on need and fully covering need. This paper investigates whether the cessation of the meeting caused a break-down of need-based aid policies or whether, as DOJ argued, the meeting was unnecessary for such policies. I also attempt to determine whether the cessation of the meeting affected tuition or tuition revenue. Finally, I examine the question of whether need-based aid is simply redistribution or a method of internalizing externalities among students. Many students would like colleges to maintain policies of need-based aid for others while making exceptions for them, awarding them grants for which they would not qualify based on need. Yet, the same students might prefer a regime of need-based aid, knowing that it would apply them, because basing aid on need affects colleges' selectivity and diversity.

School Choice and School Productivity (or Could School Choice be a Tide that Lifts All Boats?)

A school that is more productive is one that produces higher achievement in its pupils for each dollar it spends. In this paper, I comprehensively review how school choice might affect productivity. I begin by describing the importance of school productivity, then explain the economic logic that suggests that choice will affect productivity, and finish by presenting much of the available evidence on school choice and school productivity. The most intriguing evidence comes from three important, recent choice reforms: vouchers in Milwaukee, charter schools in Michigan, and charter schools in Arizona. I show that public school students' achievement rose significantly and rapidly in response to competition, under each of the three reforms. Public school spending was unaffected, so the productivity of public schools rose, dramatically in the case in Milwaukee.