Housing Disease and Public School Finances

Fernando Ferreira (Wharton)

Abstract:

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 this increase: housing disease is a fiscal  externality from housing markets in which unexpected booms generate extra revenues that  school administrators have incentives to spend. 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 find housing price elasticities of per-pupil expenditures of 0.16-0.20, which  accounts for approximately half of the rise in public school spending of the 1990s and 2000s.  School districts primarily spent the extra resources on instruction and capital projects, not on  administrative expenditures, suggesting that the cost increase was accompanied by  improvements in the quality of school inputs.