School Finance, Spatial Segregation and the Nature of Communities

This paper was written for and presented at a Lincoln Institute course titled, “International Seminar on Segregation in the City,” held July 26-28, 2001.

While the issue of school finance has been studied extensively, relatively little effort has been devoted to understanding how school finance policies impact the nature of communities. This is peculiar in light of substantial evidence that public school quality—at least in the U.S.—has much to do with residential choices by households, and in light of increasing empirical evidence that residential segregation perpetuates income inequality. In a development context where rapid urbanization is only now taking place and cities are still taking shape, these U.S. findings might have important policy implications. Whatever housing patterns emerge during the development of urbanized communities are likely to retain their character for long periods of time. School finance policies during the process of development may therefore have even larger impacts on these communities than they do in developed settings. In this paper, I emphasize in particular the importance of considering not only the level of government that is funding public schools but also the role played by the private sector. Somewhat surprisingly, simulation results based on U.S. data suggest that, in terms of producing spatial income segregation, the role of centralization versus decentralization of public school financing is quite secondary to the role played by the private sector. Motivated by this insight, additional simulations involving explicit government support for private schools in the form of vouchers are reported. Finally, while it should be kept in mind that the simulations are based on U.S. data, I discuss implications of these results in a development context.