Education finance reform: A dynamic perspective

We use a dynamic Tiebout model to analyze the consequences of moving from a pure local system of education finance to a pure state system of finance in which each student receives the same resources. While much of the education finance literature focuses on the static or immediate effects of such a change, our analysis also examines the dynamic effects. Numerical simulations for a calibrated version of our model indicate that these dynamic effects are very important. Comparing steady states, we find that aggregate welfare increases on the order of 10 percent following the switch to a state system. The key to this welfare gain is that a local system yields inefficiently low investment in human capital of children from low-income families.