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Title: School Spending, Income, and Inequality: The Efficient Redistribution Hypothesis

Citation Type: Miscellaneous

Publication Year: 2008

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Abstract: More money is redistributed to poor children in the U.S. through school spending than through any other government program such as health care, welfare, subsidized housing, orfood stamps and related programs. If the goal is simply to transfer money from high income to low income people, then economic theory suggests that school spending is a poormechanism for such transfers. The justification for such transfers is more likely the Efficient Redistribution Hypothesis which implies that, in the absence of redistribution, returns to the marginal dollar of school spending on a poor child are likely to exceed the returns to the marginal dollar of school spending on a rich child. Thus, efficiency considerations alone may justify redistribution, with no need to bring in concerns aboutinequality per se. Currently, there is no direct empirical support for the Efficient Redistribution hypothesis. In this paper, I test whether U.S. states that practiced moreredistribution through school spending ended up producing adults whose incomes were higher on average and less unequal. I exploit substantial within-state variation generated by changes in school finance policies. Owing to rather arbitrary implementation of state Supreme Court judgements, the redistributive consequences of these policies are fairly uncorrelated with other factors affecting states' income distributions. I do find thatredistributive school spending reduces income inequality among adults, but the effects are too weak to justify the use of school spending (as opposed to more direct mechanisms such as income transfers) for purely redistributive purposes. I do not find support for theEfficient Redistribution Hypothesis. Even if the Efficient Redistribution Hypothesis is correct is theory, it could fail to work in practice if schools that serve low income children make inefficient of resources.

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Authors: Hoxby, Caroline M.

Publisher: Stanford University

Data Collections: IPUMS USA

Topics: Education, Poverty and Welfare

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