Homestead exemptions and efficiency

Purpose - The purpose of this paper is to test the theory of optimal monitoring, which posits that more generous county homestead exemptions lower the incentive for residents to monitor school operations, thereby increasing inefficiency in service outcomes. Design/methodology/approach - This research uses two-stage Simar and Wilson’s data envelopment analysis to assess county school districts’ efficiency in the state of Georgia for each year from 2007 to 2012. Findings - Controlling for other factors known to be correlated with government efficiency, such as fiscal capacity and competition, this study finds evidence that higher property tax burdens resulting from lower county school district homestead exemptions, as a proxy of more intense citizens’ monitoring pressures, are associated with improved county school district performance efficiency. These results provide empirical support for the theory of optimal monitoring. Practical implications - Increased government funding toward education is more likely to improve education outcomes if accompanied by efficiency control mechanisms. One such mechanism could be increased transparency of government operations and accountability of public officials. Originality/value - This research uses a newer and more robust estimation of relative efficiency and analyzes a more common type of property tax exemption. This improves the internal validity and generalizability of the findings regarding the theory of optimal monitoring.