Journal of Real Estate Finance and Economics, 29:2, 211±231, 2004
# 2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
House Prices and the Structure of Local Government:
An Application of Spatial Statistics
DAVID M. BRASINGTON
Economics Department, Louisiana State University, Baton Rouge, LA 70803
When two internally homogeneous communities decide to jointly provide a public service, residents of each
community lose some control over the public service provision. The loss of control over public schooling
provision contributes to a $2,929 or 3.5 percent drop in constant-quality house value. Increased heterogeneity of
the consolidated district is responsible for almost all the drop; the increased number of service recipients alone is
responsible for almost none of the drop. The spatial hedonic, corrected for sample selection bias, also suggests
economies of scale gains from school district consolidation must be worth at least $3,369Ð4 percent of house
Key Words: structure of local government, consolidation, spatial autoregression, capitalization
People sort into communities based on their most-preferred level of public good provision
(Tiebout, 1956). Imagine two neighboring communities. Each is internally homogeneous,
but the communities differ from each other demographically and in most-preferred levels
of local public good provision. The two communities may decide to jointly produce a local
public good to gain scale economies, but this means they must agree on a single level of
joint provision. Since the communities liked different service levels before consolidation,
consolidating public service supply deepens the con¯ict over the optimal level of
provision (Ferris and Graddy, 1988; Borck, 1998). The loss of control over service
provision may be capitalized into house value.
Local government consolidation is an important and under-studied topic in economics.
One local governmental unit that has experienced rapid consolidation is the school district:
the number of public school districts in the United States has fallen from 125,000 in 1900,
to 84,000 in 1950, to 14,805 in 1997. The theoretical model shows that the decision of
communities to consolidate school districts depends on how much the communities'
preferences for local public services differ. Going from independent provision to
consolidated provision means a loss of control for each community in two ways: more
heterogeneous preferences and a larger number of voters.
The empirical section estimates a hedonic house price equation using spatial statistics.
The hedonic results suggest that, all else constant, having a consolidated school district
instead of an independent school district is associated with a 3.5 percent drop in house