An educational production function is estimated using achievement test scores to proxy school output, with socio-economic characteristics and expenditures in various categories as inputs. The data are school district level expenditures. Unlike most past research, a correction is made for the heteroscedasticity created by differences in school district size. Correcting for heteroscedasticity leads to statistical tests with greater power. Test scores were positively related to expenditures on instruction and instructional support, and are negatively related to expenditures on student support, such as counselling and school administration. The negative effect of counselling and administration could be due to counsellors taking up classroom time or administrators using classroom time with announcements or assemblies. Alternatively, the causality could go the other way. It could be that schools with problems hire more administrators and counsellors. The socioeconomic variables included may not fully capture the problems that a school faces. The results show that spending is useful when targeted towards instruction. The effect, although statistically significant, is not large. But, the research still finds that money matters if it is spent on instruction.
One frequently proposed policy is to consolidate rural school districts in order to save money by obtaining economies of size. The effects of school district size on both expenditures and standardized test scores are estimated for Oklahoma. Results indicate that economies of scale with respect to expenditures per student exist up to an average daily membership (ADM) of 965 students,but that as school districts become larger, tests scores decline. Even if savings in school district administrationfrom consolidation are spent on instruction, state average test scores would decrease slightly. Thus, school district consolidation can reduce costs, but it will also reduce studentlearning.
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