Order # 9580
tutorthammy
9580_Tiebout_Presentation.pptxTiebout Competition
an application to school quality, School financing, and house price capitalization
How to Pronounce “Tiebout”
“BO”
“TEA”
Motivation
Observations
Residential location determines which public schools students can attend.
Parents who can afford it seek out housing in “high quality” school districts.
Housing in school districts with “high quality” schools is generally more expensive.
Questions
Why does quality vary across districts?
If higher spending per student improves school quality, why do inequalities persist?
What factors might constrain lower-income families from accessing “high quality” school districts?
The Tiebout Hypothesis
originated in 1956 paper by Charles Tiebout while still a grad student
a general theory of how local governments determine the mix of taxes collected and public goods provided
published in the Journal of Political Economy
but didn’t get much attention at the time
Tiebout Competition
people & business can move to a neighboring city if they don’t like their current city
“voting with your feet”
city governments that raise taxes too high or spending wastefully will lose residents
cities will compete to attract and retain residents & businesses
or keep them out to “preserve quality of life”
Tiebout’s Assumptions
Utility Maximization: Residents will move to whichever city maximizes their utility.
No Transaction Costs: The cost of moving to another city is zero.
Complete Information: Residents know everything they need to know about each city to make an informed choice.
Thick Market: There are enough nearby cities to choose from so that no city has market power.
Exogenous Income: Where people choose to live does not affect their income.
Results of the Model
Tiebout Sorting
Residents who prefer low taxes and don’t care about public goods will move to cities with low taxes and government spending.
Residents who like public good X but not public good Y will move to cities that spend more on X and less on Y.
Competition incentivizes local governments to operate more efficiently, similar to competition in markets for private goods.
Under narrow and unrealistic assumptions, Tiebout competition can arrive at the socially efficient level of provision of public goods.
If residents’ preferences are heterogeneous, cities will compete by differentiation.
Public School Finance in the U.S.
In the United States, public K-12 schools are usually owned and operated by local government jurisdictions called school districts.
School districts are often independent from city or county governments.
School districts are overseen by a “school board,” which typically consists of politicians elected directly by the voters of the school district.
In some states, school boards have independent authority to raise taxes.
In other states, schools boards have limited control of their revenue and are dependent on taxes set and collected by cities, counties, or the state.
All children are guaranteed the right to attend public schools for free regardless of their parents’ ability to pay. There is no tuition or fees.
Public School Finance in California
CA K-12 funding used to be entirely determined locally by school boards
school boards could raise or lower property taxes on properties within their district
Result: huge disparities in funding, tax rates, and school quality
Serrano v. Priest (1971): CA Supreme Court ruled that this violated children’s right to a decent public education
CA legislature had to adopt new laws to equalize the per-student funding of schools
An Example Model
something like this will be on HW#6 & the final exam
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My Assumptions
Utility Maximization
No Transaction Costs
Complete Information
Thick Market
Exogenous Income
No Private Schools: parents don’t have the option to send their kids to private schools.
Election Motive: Politicians have no preferences over policy. They solely care about being elected, re-elected, and eventually becoming famous enough to run for higher offices.
Median Voter Theorem: when policy preferences can be measured on a single dimension, all politicians will adopt identical campaign platforms that represent the preferred policy of the median voter. (Downs 1957)
This follows from the model of spatial competition by Hoteling (1929).
Take Econ 154 to learn more about this.
No private schools is for simplicity. In the homework and on the test, private school might be an option.
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The Setting
Households have three choices of school district to live in. This determines:
which public schools their children can attend
what local amenities they can enjoy
To generate income, adults must commute to the central city where the good jobs are.
Households never move during the school year.
Some households have children. Others don’t.
Adults will vote for candidates for school board who will maximize their household’s utility.
Beach City School District
nice place to live, excellent weather
no good jobs in the area, need to commute to work
expensive housing due demand from tourists
Empire City School District
noisy, crowded, busy, dirty place to live
close to high-paying jobs, commute via fast and cheap public transit
cheap housing due to good policies promoting housing supply
Suburbia School District
decent place to raise children, nice parks
gated community with high HOA fees
must commute to Empire City for work
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Quantifying the Location Choices
| Beach City | Empire City | Suburbia | |
| Amenity Value (A) | 4 | 1 | 2 |
| Transportation Cost (T) | 10 | 0 | 10 |
| Annual Housing Cost (H) | 15 | 5 | 10 |
The Types of Households
| Rich Parents | Poor Parents | Dinks (“Dual Income, No Kids”) | |
| # of Households (N) | 1000 | 1000 | 1001 |
| # of Children (S) | 1000 | 1000 | 0 |
| Income (Y) | 100 | 50 | 100 |
| Utility Function (U) |
Budget Constraints
Household Budget Constraint
School Quality Production Function
consumption of all other goods
transportation costs
property tax bill
income
housing costs
avg. # of students
per household
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Order of Events
Mid June: School is out for the summer.
Households search for housing by maximizing the utility of their location choice.
Housing markets clear.
Late August: New school year starts.
Early November: Elections for school board are held.
School board sets next year’s tax rates and school quality.
Households collect their utility.
Return to step 1.
don’t memorize this
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Working through the Example
Housing Supply Constraints
Local governments have extensive powers to restrict, tax, and regulate the production of new housing.
When supply is inelastic, increases in demand drive the price up very sharply.
Supply can’t respond to the price increase.
High quality schools cause high demand for housing.
Result: “Capitalization of school quality into housing prices”
Incumbent homeowners benefit; homebuyers and renters suffer.
Current residents get to vote. People who can’t afford to live there don’t.
Examples of constraints on housing supply:
______________________________________
zoning (what kind of building can be built where)
development impact fees
minimum lot sizes (e.g. “no more than 1 house per acre”)
height limits (“we don’t want to become Manhattan!”)
“inclusionary zoning” (mandatory discounts on rent to the poor)
long public hearings to receive approval to build new housing
complicated permitting processes
city council members will often deny permits for arbitrary reasons due to a small number of highly vocal protestors
political complaints about traffic, newcomers, and quality of life (broadly: “NIMBYism”)
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How do parents assess school quality?
average test scores, graduation rates, college attendance rates
but we know that these variables are strongly correlated with parental SES
availability of honors classes and extracurricular activities
word-of-mouth, reputation, news coverage
websites like: https ://www.greatschools.org / (ratings embedded directly in Zillow listings)
racial/ethnic demographics: https :// www.thisamericanlife.org/radio-archives/episode/562/the-problem-we-all-live-with-part-one
John Oliver’s take on de facto school segregation: https://www.youtube.com/watch?v=o8yiYCHMAlM
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What about private schools?
Private schools give the parents the option to live anywhere and pay directly for high quality education.
But they must also pay the taxes that finance public schools.
Private school families have no economic incentive to vote for taxes or other policies to maintain or improve the quality of public schools.
When public school quality worsens, more parents leave the district or send their children to private schools, as well.
An extreme case of this occurred in East Ramapo, New York: https :// www.thisamericanlife.org/radio-archives/episode/534/a-not-so-simple-majority
Empirical Evidence
Not required reading
You won’t be tested on these s
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The Relationship between Test Scores and Housing Prices
Source: Dougherty, et al. (2009). “School Choice in Suburbia: Test Scores, Race, and Housing Markets.” American Journal of Education.
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What happens when residential location no longer determines school access?
Brunner, Cho, and Rebach (2012) studied 12 US states that enacted policies to allow students to transfer to public schools in other districts
Result:
for every 1% increase in the net percentage of students who attend schools outside a given district…
after the policy was implemented…
housing prices in the district where they live (but don’t attend the schools)…
rose by an average of $1,850.
In other words:
property values went down in districts that gained students (presumably “high quality districts”)
property values went up in districts that lost students (presumably “low quality districts”)
Prices before the policy were distorted by demand for access to high quality schools
https://econpapers.repec.org/article/eeepubeco/v_3a96_3ay_3a2012_3ai_3a7_3ap_3a604-614.htm
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What if school districts may allow transfers but aren’t required to?
Clarke (2017) studied Indiana’s policy on school choice
Indiana implemented a policy in 2010 which allowed districts to decide whether they want to accept transfers from other districts
State-funding follows the student to the school they choose.
In general, only school districts where homeowners had nothing to lose by allowing transfers chose to implement the policy.
districts with low quality schools
districts with high elasticity of supply of housing
Note: Wyatt Clarke is a grad student at UC Irvine, not the same person as Professor Damon Clark. Clarke (2017): https://drive.google.com/file/d/0B9QeqABZx5d8Q3dXUFAzVEg2M0k/
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Conclusion
“School choice” is a hotly debated political topic.
Professor Clark will discuss explicit forms of school choice next week.
Don’t forget that implicit school choice already exists:
Most parents choose schools for their children by their residential location choice
This distorts housing markets (on top of many other distortions to housing markets).
In the United States, the political economy of local public school provision contributes to
residential segregation
inequality of opportunity in K-12 education
