Demand Matters : School District Concentration, Composition, and Educational Expenditure

Whether competition improves governments' efficiency is an enduring question in Local Public Economics. Based on Tiebout's framework, recent research suggests this effect is operative for school districts: decentralization (greater district availability) may reduce expenditures without sacrificing performance. Other research, however, draws on Tiebout to warn that school finance reforms, by effectively centralizing educational provision, may also lower expenditure. These literatures disagree because they emphasize different aspects of a Tiebout mechanism: competition, on the one hand, and the effects of stratification on demand, on the other. Testing their claims is difficult due to the endogeneity of district formation. To address these issues, this paper notes that metropolitan areas in fact contain two educational markets, one at the primary and one at the secondary level. Because in many cases different numbers of districts operate at each level, it is possible to identify the effects of concentration using differences in district availability between levels, within areas. The results suggest district availability does lead to Tiebout-style segregation, which may explain why it is also found to be associated with greater average expenditure