SCHOOL QUALITY AND INFORMATION DISCLOSURE: EVIDENCE FROM THE HOUSING MARKET

I. INTRODUCTION Tiebout's (1956) theory tying residential sorting patterns to the provision of local public goods provided the foundation for a large and growing literature assessing the relationship between school quality and housing markets. Many of these studies have used housing prices to directly estimate the monetary value of improvements in student test scores to parents and homeowners. Few have focused on the role of information in mediating relationships between buyers, sellers, schools, and housing values. (1) Fewer still have examined the behavior of home sellers and their role in the provision of information on school quality. This article takes a step toward filling these gaps in the literature. Building on the "unraveling" theory of information disclosure in the industrial organization literature (Grossman 1981; Milgrom 1981), we first investigate the behavior of home sellers in revealing information about local schools. We ask whether and how school quality affects the likelihood that a seller will reveal the identity of a property's assigned school in an online real estate listing. Empirical tests of unraveling are rare, as the true quality of a product is typically unobserved: the housing market provides a novel context to test this theory. If sellers selectively reveal information on schools, then information on its own--controlling for school quality--may have an impact on sales prices if the cost to buyers of obtaining information on school quality is sufficiently high. We explore these issues empirically both in a period where the costs of gathering information are relatively high (years 2001 and 2002) and in a period where these costs are presumably much lower (years 2006 and 2007). Between these two periods, the mandates of the 2001 No Child Left Behind (NCLB) Act, coupled with the growth of the Internet undoubtedly reduced the cost of information gathering for potential buyers and perhaps also lowered the costs of disclosure for sellers. Drawing on Multiple Listing Service (MLS) data of residential sales in Fairfax County, Virginia--the largest suburb of Washington, DC--our results confirm that sellers of units located in high-quality school assignment zones are, on average, more likely to disclose the school's identity in an online listing. An increase of just ten points in an elementary school's passage rate on statewide tests increases the likelihood of information disclosure by a sizeable 5 percentage points in the 2001-2002 period--a finding that is robust to a variety of alternative specifications and controls, including the addition of real estate agent fixed effects. Predictably, selective disclosure appears to be present, but weaker in the 2006-2007 period when the cost of gathering information on school quality was likely lower: a ten-point increase in test scores yields a 2 to 4 percentage point increase in the likelihood of disclosure. Our findings of moderate selective disclosure in the latter period hold even when we apply a school boundary discontinuity design and are robust to alternate measures of school quality, including measures of "Adequate Yearly Progress" under NCLB. In both periods we observe more selective disclosure for single-family homes and those with three or more bedrooms (presumably families with children) than for smaller units. We also find more selective disclosure in neighborhoods with high concentrations of young children. Our results support the findings of several previous studies (Bayer, Ferreira, and McMillan 2007; Figlio and Lucas 2000) confirming that school quality is more important in housing transactions involving families with children than for those without. We also investigate the extent to which information disclosure is capitalized in housing prices. Using school fixed effects to control for school quality, we find that information disclosure does not have an independent effect on a home's price. …