Education inputs, student performance and school finance reform in Michigan

This paper estimates the impact of the Michigan school finance reform, Proposal A, on education inputs and test scores. Using a difference-in-difference estimation strategy, I find that school districts in Michigan used the increase in educational spending generated through Proposal A to increase teacher salaries and reduce class size to a smaller extent. Then, using the foundation allowance created by Proposal A as an instrument, I estimate the causal effect of increased spending on 4th and 7th grade math scores for two test measures - a scaled score and a percent satisfactory measure - and find positive effects of increased spending on 4th grade test scores. A 60% increase in spending increases the percent satisfactory score by one standard deviation. The positive impact of expenditures on test performance seems largely due to higher teacher salaries. (C) 2008 Elsevier Ltd. All rights reserved.