School Finance Equalization and Intergenerational Income Mobility: Does Equal Spending Lead to Equal Opportunities?

Abstract

School finance reforms have been implemented across US states in the past 40 years to equalize expenditure across school districts. This paper exploits such changes to examine the effects of inequality in school expenditure on intergenerational income mobility of students. I use the slope coefficient of per-capita income on per-pupil expenditure within each commuting zone as a summary statistic of inequality in expenditure. I address issues of omitted variable bias and endogeneity of expenditure using the parameters of the financing formulas to generate simulated instruments for expenditure. OLS and 2SLS estimates show that school finance equalization substantially improves intergenerational mobility of children born in low-income families, and has no effect on mobility of richer children. The effect of equalization is largest during primary school years, and smallest during middle school years. My results also show that an overall increase in school expenditure improves mobility of poorer children. These results suggest that equalization of expenditure across districts is important to guarantee equal long-run opportunities of children.