Capital Expenditure by School Districts: Driven by Enrollment or Income?
Abstract
Using 2,609 school districts over 40 years, we estimate a cointegrated relationship that shows how capital spending in the long run depends on school district population, enrollment, and per capita income. Assuming that capital spending is endogenous to these variables, we estimate an error correction model that shows how capital spending adjusts to shocks to population, income, and enrollment. We find that school spending reacts slowly to shocks and in particular, converges very slowly to the long-run stochastic equilibrium. These patterns are illustrated using graphically using impulse response functions. We find that school districts that make frequent use of borrowing have relatively higher school capital. These results challenge the belief that school districts operate on identical education production possibilities frontiers, suggesting that estimates of the return to school capital may be biased by different district objectives or administrative practices.