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. (c) 2004 Elsevier Inc. All rights reserved.