Authors: Rajashri Chakrabarti and Joydeep Roy

Local financing of public schools in the United States leads to a bundling of two distinct choices – residential choice and school choice – and has been argued to increase the degree of socioeconomic segregation across school districts. A school finance reform, aimed at equalization of school finances, can in principle weaken this link between housing choice and choice of schools. In this paper, we study the impacts of the Michigan school finance reform of 1994 (Proposal A) on spatial segregation. The reform was a state initiative intended to equalize per-pupil expenditures between Michigan school districts and reduce the role of local financing. We find that Proposal A was responsible for increases in the value of housing stock in the lowest-spending school districts, and for improvements in several socioeconomic indicators in these districts, implying a decline in neighborhood sorting. We also find that the reform affected dispersion of incomes and educational attainment within school districts, increasing within-district heterogeneity in the lowest-spending school districts, while decreasing the same in the highest-spending districts. However, there is continued high demand for residence in the highest-spending communities, suggesting the importance of neighborhood peer effects ("local" social capital) and implying that even a comprehensive government aid program can fail to make a large impact on residential segregation.