Income Stratification Across Public and Private Education: The Multi-community Case

This paper analyses the question of which households opt out of public education in a multi-community economy with local school finance and housing markets. In particular, the objective is to investigate whether perfect income stratification across public and private educational sectors predicted by single jurisdiction models and by multiple jurisdiction ones without housing markets holds in this setting. Nechyba (1999) has shown that the existence of a fixed stock of heterogeneous houses can prevent perfect income stratification from arising in equilibrium. Here we demonstrate that, even with homogeneous housing, perfect income stratification is not assured. On the contrary, it is possible to find equilibria in which households from intermediate income intervals use private schools, while richer ones prefer to send their youths to a local public school of higher quality. The emergence of very high quality public schools that attract students from the best-off households and survive the competition of private schools is therefore possible. The paper identifies a new way whereby housing markets affect how the market for education works.