EDUCATION FINANCE REFORM - A DYNAMIC PERSPECTIVE

We use a dynamic Tiebout model to analyze the consequences of moving f rom 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 immediat e effects of such a change, our analysis also examines the dynamic eff ects. Numerical simulations for a calibrated version of our model indi cate that these dynamic effects are very important. Comparing steady s tates, we find that aggregate welfare increases on the order of 10 per cent following the switch to a state system. The key to this welfare g ain is that a local system yields inefficiently low investment in huma n capital of children from low-income families.