Can We Save the American Dream? A Dynamic General Equilibrium Analysis of the Effects of School Financing on Local Opportunities

Fabian Eckert and Tatjana Kleineberg

Neighborhoods in the US differ substantially in the educational and economic opportunities that they offer to children who grow up in them. We develop and estimate a structural spatial equilibrium model of residential and education choice to study the effects of school financing policies on education outcomes, intergenerational mobility, and welfare at the local and aggregate level. Our model generates persistent effects of children’s neighborhoods on adult outcomes through local labor market access and local human capital formation. Local school funding is an important component of the latter. Schools are funded through income taxation and local rent taxation. We estimate the model using a range of US Census datasets by fitting model predictions to regional data of the actual US geography. We use the estimated model to study the effects of counterfactual policy interventions, in particular, the equalization of school funding across all students and the use of rent subsidies. We find that general equilibrium responses in local prices and local skill compositions significantly dampen the partial equilibrium effects of the policy, so that effects on education outcomes and intergenerational mobility are positive but only moderate in general equilibrium.

I find the result of this very good paper very disappointing. There is a sense that a lot of Einsteins are missed because of the uneven distribution of school funding in the United States. This paper shows that education remains mostly prohibitive for the poor if you centralize school funding. This is because their neighborhoods become more expensive.

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