A fascinating, age-old U.S. public policy question surrounds the relationship between educational outcomes and segregation (e.g., income, racial). Over the years, growing economic literature continues to add nuanced perspectives to the issue of the interaction between school finances and the makeup of local communities. Social science researchers emphasize the importance of studying residential segregation, whether by income or race-ethnic groups, because of potential neighborhood effects on the long run educational outlook for young students. Since public education in the U.S. is largely financed by local property taxes, there is a large disparity between funding for schools in different communities.
Thomas Nechyba, “School finance, spatial income segregation, and the nature of communities”:
Although many education policy workers focus almost solely on the impacts of disparate per pupil expenditures across schools, a large body of economic research shows strong evidence that there are broader factors affecting educational inequities, and vice versa. For instance, since public school systems are based in local districts, residential segregation by income is more likely to occur—and over time this greater residential segregation feeds even larger inequalities, thus leading to a relentless cycle. Differences in education quality are capitalized into housing prices (i.e., property values often further decline in poor areas with inadequate schools).
Nechyba (2003) questions why the contemporary educational inequalities discussion is so restricted to per pupil spending gaps; rather, he calls for a more general examination of different school finance institutions and their various equilibrium effects. Thus, the paper sets up a structural model representing a decentralized economy in which households select their place of residence, where to send kids for education, and the degree of support to provide public schools; the model includes the most causal potential factors leading to income segregation. Using observations from New Jersey districts, Nechyba (2003) adjusts the underlying structural parameters until his model simulates realistic features from the data. Then, holding these parameters constant, policy simulations can be conducted. The framework accounts for a couple main sources of residential segregation by income: 1) different neighborhoods are historically endowed with disparate housing quality and neighborhood characteristics; 2) places of residence affect a child’s school quality since public education systems require households to live within exogenously outlined boundaries. However, the inclusion of private schools into this model complicates matters because households that send their children to private educations care less about public school quality near their homes; alternatively, they would be even motivated to live in a subpar public school district with lower housing costs. Since private school households are often wealthier, this counterintuitive phenomenon pushes the local economy toward income desegregation.
Subsequently, Nechyba (2003) use the structural model to find that state financing of school districts indeed dampens residential income segregation in an area.  This effect is expected because school systems that are purely locally financed give wealthier households motivation to segregate by income and thus shape better schools. However, two less intuitive findings are that the existence of a private school market leads to considerable residential income desegregation, and that in the presence of private schools, the existence of public schools actually tends to lower residential segregation—even though, by themselves, public school systems are associated with higher spatial segregation. However, a notable caveat to this study is that the model equilibrium overestimates the movement of private school households into poorer neighborhoods simply because the structural model does not account for non-school characteristics of such communities.
Raquel Fernandez and Richard Rogerson, “Keeping people out: income distribution, zoning, and the quality of public education”:
Meanwhile, Fernandez and Rogerson (1993) investigate the effects of community zoning regulations on per pupil spending, particularly with respect to property taxes and the formation of communities with average income differences. The analysis relies on simulations using a two-community model, where each community determines tax rates by majority vote, and households can choose their place of residence. Without zoning, the equilibrium of this model results in a poor neighborhood with a low tax rate (i.e., low per pupil expenditure) and a wealthier community with a higher tax rate. The study found that the existence of zoning regulations, meaning that households have to purchase a minimum level of housing in order to live in a predetermined area, is associated with the wealthy community decreasing in size and becoming richer, while the poorer neighborhood grows larger. The increased exclusivity of the rich neighborhood causes the lowest income households of that neighborhood to enter a poorer one, thus raising average income in both areas. As a result, the poorer community sees greater per pupil spending, but the change in education quality across the two areas is ambiguous.
Sarah Reber, “School desegregation and educational attainment for blacks”:
Although the first two studies mentioned did not delve into racial segregation, it is important to gauge the relationship between segregation and educational attainment for certain race-ethnic groups. Reber (2007) looks into the effects of the desegregation process after the Supreme Court’s 1954 Brown v. Board of Education decision, specifically focusing on schools in Louisiana. Previous studies showed that the desegregation policy had two effects: 1) increasing black students’ exposure to white peers in school and 2) raising the level of federal and state funding such that the average spending in predominantly black schools increased. Given that desegregation essentially eliminated disparities in student-teacher ratios for black and white students within previously segregated districts, Reber (2007) sought to determine whether greater educational attainment by blacks following desegregation resulted more from greater exposure to white peers or increased funding.
The simplest specification in this paper is a univariate regression that looks for an association between a county’s initial share of black enrollment and change in educational attainment from before and after desegregation; in this model, the dependent variable of interest is mean attainment for 1970-1975, minus the average attainment for 1960-1965. Later, the paper considers metrics such as the 12th grade continuation rate and adds controls for other characteristics such as change in county’s employment. These regressions on high school grade continuation and graduation rates indicate that greater educational attainment increased more for black students in districts with higher rates of black enrollment following desegregation—thus implying that, following desegregation, increased funding played a larger role than higher exposure to white students in raising attainment.
Growing literature contribute to U.S. policies designed to match educational opportunities of students coming from vastly different racial and socio-economic backgrounds. Whether through investigating the means by which certain communities are able to make use of taxes and zoning as instruments to keep specific segments of the population out of a school district, or by evaluating the effect of private schooling on income segregation, valuable insights can be drawn from these types of analyses. A thorough look at the institutional set-up of education can reveal the role that segregation and various school finance mechanisms play in long-run inequality.
Raquel Fernandez and Richard Rogerson, 1997, “Keeping people out: income distribution, zoning, and the quality of public education,” International Economic Review 38(1): 23-42.
Sarah Reber, 2007, “School desegregation and educational attainment for blacks,” Cambridge, MA: NBER working paper 13193.
Thomas Nechyba, 2003. “School Finance, Spatial Income Segregation and the Nature of Communities,” Journal of Urban Economics 54(1), 61-88, July.
 Thomas Nechyba, School finance, spatial income segregation, and the nature of communities, 66: It is notable that although this analysis focuses on income segregation, it can apply to problems involving racial segregation as well, “only to the extent that such segregation is driven by income differences.”
 Nechyba, 65
 Nechyba, 74: “While it might be expected that state financing will lead to less segregation than local financing, the relatively small magnitude of this effect compared to the huge effect of private schools is surprising, as is the different effect of public schools in a world with and without private school markets.”
 Raquel Fernandez and Richard Rogerson, “Keeping people out: Income distribution, zoning, and the quality of public education,” 1
 Fernandez and Rogerson, 32
 Sarah J. Reber, “School desegregation and educational attainment for blacks,” 3
 Reber, 6: To prevent white flight, schools with larger proportions of black students received more funding to “level up to the levels previously experienced only in the white schools”