Labor versus Capital in the Provision of Public Services: Estimating the Marginal Products of Inputs in the Production of Student Outcomes

Does the enormous variation in financial resources available to local schools affect student achievement? There is an intense debate over the inequality of opportunity in public schools due to differences in financial resources, but there is little empirical evidence that sheds light on this issue. The main purpose of this paper is to measure the impact of various types of school expenditures (i.e. operating, minor capital, and major capital expenditures) on the short- and long-term educational achievement of students. This paper also looks at various channels (i.e. class size, attendance, discipline, and teachers' compensation) through which each type of expenditure could affect the performance of students. I use a dynamic regression discontinuity design that relies upon the exogenous variation in public school funding in Ohio that is created by marginally approved or failed local referenda to fund school districts. I find that only one type of expenditure, the approval of additional operating expenditures, has a positive effect in the short-term on the math proficiency of students subject to Ohio high school graduation tests, i.e. about 0.033 standard deviations (0.27 percentage points) for every additional $1,000 extra per pupil operating expenditure. I also find that the subsequent increase in the average expenditure on instructional staff is the only channel that can explain this effect. I do not find any long-term effect for any type of school expenditures.