ALL SCHOOL FINANCE: Categorical Aid as an Add-On 2

Flat grant categorical aid just requires that the district per-pupil budget constraint be modified as follows:
where ca0 is the matching rate. There are tildes on rand v to remind us that households may change their purchases of housing services or their local tax rate because they have to pay income or sales taxes to fund the flat grants and matching grants.

So long as the vector of demographic variables, Xi9 includes only factors that are exogenous to the conduct of a school district (at least in the short-run) and the tax base that funds categorical aid is invariant to an individual district’s conduct (for instance, an income or sales tax), either type of categorical aid is a perfectly standard fiscal federalism problem. We expect flat grants to have income effects and matching grants to have both income and substitution effects. We may also expect flypaper effects.
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ALL SCHOOL FINANCE: Categorical Aid as an Add-On

Finally, SFE schemes can penalize the taste for education, by making families with greater taste for education redistribute to other families with identical incomes but less taste for education.

In this section, I describe two prototypical SFE formulas: foundation aid and guaranteed tax revenue/power equalization. The prototypes illustrate the general properties of equalization schemes, but we should keep in mind that every state’s school finance formula is different and that the prototypes are extremely parred down compared to actual formulas.
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Pure Local Property Tax Finance

Although no state’s schools are currently financed through pure local property tax finance, it remains the core of most states’ systems. Let i index districts, and let et be spending per-pupil, v, be property value per pupil, z* be the property tax rate, and r{ be local revenue per pupil. Under pure local property tax finance, the per-pupil budget constraint is given by:
Under pure local property tax finance, it does not matter whether the property value used above is market value or assessed value, since the local tax rate could be adjusted to account for assessment practices. As soon as states offer aid based on property values, they have to ensure that all districts assess at market value (or, at least, assess similarly relative to market value).5 For the theoretical part of this paper, it is best to ignore differences in assessed and market values, and simply treat v, as though it were always market value and treat r-{ as though it were the tax rate on market value.

ALL SCHOOL FINANCE: Introduction 3

The results suggest that, for two reasons, near equality of per-pupil spending cannot be achieved without substantial decreases in the average level of per-pupil spending. First, districts do not react as strongly to “carrots” (tax prices below one) as they react to “sticks” (tax prices above one). Second, near equality of spending only appears to be achievable under schemes that contain extremely strong incentives (I show below that the schemes in California and New Mexico fit this description). However, a scheme with tax prices below one (designed to level up) cannot contain such extremely strong incentives.
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It would be far too expensive, requiring massive annual infusions from the state’s general revenues. For both of these reasons, strong “sticks” (schemes with tax prices much greater than one) are needed to achieve near equality of per-pupil spending. But, since such schemes level down, poor districts can actually end up with lower per-pupil expenditure under SFE schemes that achieve near equality. I show that poor districts maximize their per-pupil spending under milder SFE schemes than those that exist in California or New Mexico.

ALL SCHOOL FINANCE: Introduction 2

Once we recognize that SFE schemes are tax systems for school districts, we can focus on a few key parameters affected by SFE schemes, most notably the tax price of local spending. If an SFE imposes a tax price greater than one on a district, the district has to raise more than one dollar in revenue to spend a dollar, and spending is discouraged. The converse is equally true. Past research and even some continuing research-such as Evans, Murray, and Schwab (1995, 1997), Downes and Shah (1994), Manwaring and Sheffrin (1996), and Card and Paine (1997)~has treated SFEs as events, using a single dummy variable that lumps together schemes that generally raised tax prices far above one, like California’s, and schemes that lowered tax prices below one, like New Jersey’s.
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Because this dummy variable methodology lumps schemes with conflicting incentives into the same “treatment group,” it naturally produces poor results that do not reflect the actual equalization policies and are non-robust to small differences in specification. The dummy variable methodology is not improved by creating two separate dummy variables -one for those in which the SFE was court-ordered and one for those in which the SFE was legislative.


When state courts and legislatures decide to equalize spending across school districts, they are usually clear about their goals and the legal issues. For instance, debate about the meaning of the words “adequate education” in a state’s constitution can be sophisticated. States are far less clear, however, on how to frame a tax system to implement their goals. Since 1970, most American states have enacted one or more school finance equalization schemes, the distinctive feature of which is redistribution from districts with higher property values per student to districts with lower property values per student.

School finance equalization schemes have frequently replaced categorical aid schemes that provided funds to districts with students coming from low income households. Despite all this activity, there is little to suggest that states have learned to calculate the incentives created by equalization schemes or have learned from one another’s experiences so as to choose better schemes. Few states appear to have asked themselves whether the incentive properties of school finance equalization schemes are superior or inferior to those of categorical aid. In the last thirty years, no policy that so seriously affects American schools has been changed so significantly with so little understanding of the likely consequences as has school finance.


Thus, given propositions 6 and 7, the monetary regime game has the structure of a prisoners’ dilemma game: there is a cooperative outcome which is jointly optimal but is not an equilibrium. As in that extensive literature, the gains from monetary union are only enjoyed if countries cooperate in the creation and enforcement of monetary union.


The goal of this paper was to provide a basic framework for analyzing the gains, both potential and effective, to monetary union. To do so required two steps.

The first was the construction of a model to assess the gains to the creation of a common currency. The main hurdle in the theoretical analysis was to generate money demand. This is accomplished here by the optimal imposition of cash-in-advance constraints by both countries. Given these constraints, households who face taste shocks are frequently stuck with the ” wrong portfolio” of consumption goods. Further, these households face an inflation tax imposed by foreign governments. By eliminating control over their money supplies through the creation of a monetary union, countries can

jointly increase the welfare of citizens. Thus, as suggested by the European Commission’s report on monetary union, the gains arise from more efficient allocations and price stability.

The second piece of the analysis was understanding how countries could reap these gains. In this regard, our main finding is that monetary union is a monetary regime unlikely to be established by non-cooperating countries since each, acting independently, could prefer to impose a local currency requirement (assuming that taste shocks are not too variable) and inflate. Put in other terms, monetary union can be obtained only through the joining of sovereign countries to a cooperative scheme involving commitment.

MONETARY UNION: Establishing A Monetary Union 5

This selection of an equilibrium following the defection of the home government seems to be a reasonable one since the currency of the country imposing the CIA can be used in both countries while the currency of the country not imposing the CIA can only be used in its own country. Further, this selection seems compatible with the ” intuitive criterion” in that a government would never defect from monetary union unless it thought that the natural outcome would be the equilibrium in which its currency had value. So, observing this defection, the equilibrium in which the currency of the country imposing the CIA is the one valued would be focal.

There are, however, other equilibria in the event that only one country imposes a CIA. In one of them, only the currency of the country not imposing the CIA has value.14 Clearly, this equilibrium is one of autarky for home agents since it is impossible to purchase the goods produced in the country imposing the CIA since that currency has no value. Thus home agents have no income. If this was the equilibrium selected in the event the home country defected from a monetary union, then clearly that defection would not be desirable and monetary union would indeed be an equilibrium. Thus our result clearly requires the selection of a particular equilibrium but one which seems quite natural. It’s really quick so sign up with us to get an easy personal loan online. You get approved for the loan you need in no time and get the money sent to you without any delays. We take your needs and situation very seriously, which us why you can always count on speedy processing of your applications by so.