Do Households Prefer Small School Districts? A Natural Experiment

[Author Affiliation]H Spencer Banzhaf, , , , hsbanzhaf@gsu.eduGarima Bhalla, , , , gbhalla@live.unc.edu[Acknowledgment]We thank Rajashri Chakrabarti, Rob Fleck, Jason Fletcher, John Pepper, Jesse Rothstein, Holger Sieg, David Sjoquist, Todd Sorensen, Christiana Stoddard, Randall Walsh, anonymous referees, and participants of a session at the 2006 Southern Economic Association meetings and seminars at Montana State University and the University of Pittsburgh for valuable comments.1. IntroductionPerennial discontent with the quality of public education in the United States is a constant motivation for new educational reforms. One potential reform is to break up large urban school districts into smaller districts.1 This proposal emerges from two lines of logic. First, large districts may suffer from substantial diseconomies of scale: A recent review of the evidence concludes that diseconomies may emerge in districts with as few as 15,000 students (Andrews, Duncombe, and Yinger 2002; see also Barrow and Rouse 2004 and Duncombe, Miner, and Ruggiero 2005). By comparison, the urban districts of New York City, Los Angeles, and Chicago handle as many as 1.1 million, 727,000, and 421,000 students, respectively!A second line of logic is that breaking up large school districts would provide more choice for households. In particular, the smaller districts may be differentiated horizontally, with some emphasizing math, others reading, others specific extra-curricular courses, and so forth. Since smaller districts can respond better to parental input, these differences can reflect local tastes. Additionally, the new districts would have to compete with one another for students, enhancing their incentive to improve their performance (Borland and Howsen 1992, Hoxby 2000, Hanushek and Rivkin 2003, Sandstrom and Bergstrom 2005).These reforms are subject to a market test. Following the logic of Tiebout (1956), households should respond to exogenous changes in public goods by "voting with their feet," that is, moving into improving communities and bidding up prices.2 Consequently, if households perceive that decentralizing large school districts is desirable for any of these reasons, we would expect the ceteris paribus demand for housing to increase in school districts undergoing such reforms, relative to nearby substitutes. This article examines just such a market test, studying the effect on local real estate markets surrounding the April 2000 breakup of the Los Angeles Unified School District (LAUSD) into 11 subdistricts. This breakup was only partial, insofar as official authority remained vested in a single school board. Nevertheless, the breakup delegated substantial power to a more local level, creating 11 new superintendents and devolving authority over educational policy and curricula to the new subdistricts.We employ a difference-in-differences hedonic methodology comparing changes in real estate prices before and after the breakup announcement within the LAUSD area to price changes in nearby districts. Our approach has three distinct advantages. First, the October 1999 announcement of the breakup plan was abrupt and surprising and was swiftly followed by official passage in April 2000. Because the announcement was so abrupt and so well covered by the media, we have an excellent proxy for households' expectations--and it is expectations, after all, that govern market behavior. Our proxies for expectations are based on the announcement date, the implementation date, and in some models an index of newspaper coverage. Second, few of the benefits of the reform would be likely to spill over into other school districts, making the LAUSD border a sharp boundary defining relevant control groups. Third, the LAUSD area is not coextensive with the city of Los Angeles but rather includes some 24 cities. This implies that any other potentially confounding political events over the period would affect real estate markets in only a portion of the LAUSD rather than the whole area, a possibility that we can test. …