The Efficiency-Equity Trade-off in a Federal System: Local Financing of Schools and Student Achievement.

This article examines the trade-off between efficiency and equity in funding local public services, focusing specifically on K-12 education in the United States. Using nationally representative data from the National Assessment of Educational Progress (NAEP) between 1990 and 2017, the study finds that a higher share of education funding from local revenue sources is associated with modest increases in average student achievement (about 0.05 standard deviations per 10 percentage points increase in local funding) but also with widening socio-economic status (SES) achievement gaps (about 0.03 standard deviations). The analysis employs ordinary least squares (OLS), event study models of court-ordered school finance reforms, and geographic regression discontinuity designs, all of which support the existence of this efficiency-equity trade-off. The study further identifies “voice” (local preferences influencing spending priorities) and “exit” (families’ ability to choose districts) mechanisms as moderators that amplify efficiency gains but also contribute to greater inequities. These findings have implications for intergovernmental grant policies, suggesting that shifting funding from local to higher government levels may reduce achievement disparities but at the cost of overall educational performance.