The Impact of Intergovernmental Incentives on Student Disability Rates

Abstract

Measured disability rates among school-age children and the associated spending on special education programs have risen steeply over the past thirty years. Currently, about 15 percent of U.S. school children are classified as "disabled." Many observers note that the special education funding programs established by state and federal governments create an incentive for local school districts to drive up disability rates, potentially accounting for some of the rise in measured disability rates. I use the experiences following a major reform of the special education funding system in California to examine this issue. Between 1996 and 1998, the state converted from a system that awarded funds based on the number of students classified as disabled in a district (with funding rates that varied across districts) to one based on total enrollment. This reform induced changes in the total funding awarded to different districts and also reduced the marginal revenue from classifying an additional student as disabled to zero. Consistent with standard models, I find that the California reform creates both "income" and "substitution" effects on the number of students classified as disabled.