Peter Blair - Harvard University

The United States ranks low among peer countries on the ratio of teacher spending to per capita GDP. Is this (in)efficient? Using a spatial equilibrium model of residential choice we show that spending on schools is efficient if an increase in school spending funded through local taxes would leave house prices unchanged. Exploiting plausibly exogenous shocks to both school spending and taxes paired with 25 years of national data on local house prices, we find that an exogenous tax-funded increase in school spending would significantly raise house prices, providing causal evidence that teacher spending in the U.S. is inefficiently low.