Matching under school and home bundling

The consumption of urban public resources—for example public schooling—is typically geographically bundled with home locations. When households differ in valuations of housing and in student abilities, the positive and assortative matches between school qualities and student abilities sometimes fail to be achieved by the housing market equilibrium, resulting in a misallocation in education. We propose a mechanism that improves school matches by making the property tax imposed on the high-quality house–school bundle deductible conditional on school performance. Conditional deductibility induces a transaction of houses that improves school matches at the cost of a distortion in housing consumption, and we show that: (1) a small and positive tax is strictly welfare-improving; (2) such tax is Pigouvian corrective in terms of alleviating budget constraint; and (3) a lower degree of inter-jurisdictional differentiation in housing enhances the welfare effects of tax.