Uncertain School Quality and House Prices: Theory and Empirical Evidence

Abstract

Observable measures of public school quality provide noisy signals of underlying quality to parents. Accordingly, this paper examines the house price effects of school quality and quality uncertainty. Residential bid rent theory under this type of uncertainty shows that greater school quality increases housing prices and steepens the gradient whereas quality risk decreases housing prices and flattens the gradient. The empirical models incorporate two sources of quality risk, the uncertainty over the quality of a given school and the uncertainty over which school a household will be assigned. Estimates reveal capitalization consistent with the theory. Including risk measures in the empirical model reduces quality level effects. All capitalization effects tend to be stronger in higher income neighborhoods. Further, attendance zone uncertainty exhibits more stable capitalization across subsamples than does uncertainty over the performance of a given school.

Keywords: School Quality, House Price, Uncertain School Quality, Capitalization