A Simultaneous Equations Model of the Demand for and Production of Local Public Services: the Case of Education

Abstract

In this article I specify a simultaneous equations model of the demand for and production of educational outputs, estimate the model for 46 Los Angeles County school districts, and use the model to simulate the effects of a county-wide property tax base sharing policy. The price elasticity estimates for educational outputs are far more inelastic than previous estimates. My income elasticity estimates are mildly inelastic and similar to previous estimates. I demonstrate that previous studies, which estimated reduced-form expenditure functions, were misspecified and did not estimate the demand elasticities for local public services. I also demonstrate that an areawide tax base sharing plan assists the poorest school districts but also benefits middle- to upper-middle-income low-property tax base districts and harms lower- to middle-income high-property tax base districts.