House Prices and the Provision of Local Public Services: Capitalization under School Choice Programs

While the theoretical public finance literature argues that house prices should be influenced by the demand for local public services, there is little direct evidence concerning changes in house prices when these services are altered. Previous empirical studies have relied on cross-sectional identification of the relationship between house prices and variables that may proxy for the perceived quality of local public services. This paper instead examines a policy change, the adoption of a public school choice program, to identify the capitalization effects associated with the diminished importance of school district boundaries. Using data from inter-district choice in Minnesota, I find that residential properties appreciate significantly in school districts where students are able to transfer to preferred school districts, whereas residential property values decline in districts that accept transfer students. These general equilibrium effects also influence school districts’ local property tax revenues, mitigating the incentive for schools to improve in order to attract or retain students. “Most real estate agents and builders must be generally conversant with school districts' reputations and what types of programs are offered by which one.... A particular district in Minnesota doesn't have to be the deciding factor on choosing a home, however. Minnesota is nationally known for its open-enrollment program, wherein students may apply to attend schools in districts outside of their home district anywhere in the state.” Ingrid Sundstrom [27], Minneapolis-St. Paul Star Tribune, February 5, 1994.