A theoretical and empirical model of the demand for local public education services recognizing the effects of capitalization and closed-end matching grants

The existing literature on the demand for local public education services rarely recognizes the capitalization of inter-district differentials in education-tax packages into housing values. The local education-tax package is capitalized into housing values if a higher level of education services or a lower tax rate increase housing values, other things held equal. Capitalization creates an interdependence or simultaneity between property values and the demand for education. State government grants to local school districts that are a function of local property values and local taxes are an additional source of simultaneity. Because of the simultaneity between property values and the demand for education, education demand estimates that assume property values are exogenous may be biased and inconsistent.;Chapter 2 of this dissertation incorporates capitalization and typical state education finance programs into a model of the demand for local public education. The theoretical model predicts that changes in intergovernmental grants-in-aid cause not only income and substitution effects but also capitalization effects. The direction and magnitude of the capitalization effects depend on the elasticity of housing values with respect to local education provision and the composition of the local property tax base.;In Chapter 3 the significance of the capitalization effects is tested by estimating education demand in Texas using a simultaneous equation model that jointly determines price, aid, and education demand. The empirical specification corrects for the self-selection bias created by closed-end matching grants. Econometric tests show capitalization effects are significant for most Texas school districts. Capitalization effects are found to be stronger in urban districts and demand is found to be more elastic in rural districts.;Chapter 4 of this dissertation examines capitalization and the definition of education services by estimating demand using several measures of education. The results indicate that homeowners value expenditures, smaller classes, and overall quality but not higher standardized test scores.;This dissertation concludes that the capitalization of local education-tax packages into housing values does affect the demand for education and school district responses to changes in state education finance programs. We find, for Texas school districts, that ignoring capitalization effects causes estimates of education demand to be biased and inconsistent.