School Finance Equalization Increases Intergenerational Mobility: Evidence from A Simulated-Instruments Approach

Abstract

This paper estimates the causal effect of equalizing revenues across public school districts on students' intergenerational mobility. I exploit differences in exposure to equalization across seven cohorts of students in 20 US states, generated by 13 state-level school finance reforms passed between 1980 and 2004. Since these reforms create incentives for households to sort across districts and this sorting affects property values, post-reform revenues are endogenous to an extent that varies across states. I address this issue with a simulated-instruments approach, which uses newly collected data on states' funding formulas to simulate revenues in the absence of sorting. I find that equalization has a large effect on mobility of low-income students, with no significant changes for high-income students. Reductions in the gaps in inputs (such as the number of teachers) and in college attendance between low-income and high-income districts are likely channels behind this effect.

Keywords: School Finance, Intergenerational Mobility, Simulated Instruments

JEL Classification: I22, I24, J62