Public education spending in the German Länder: adjustment to demographic shocks, politics, and cost efficiency

In this dissertation, I examine three major aspects of Germany's education system from an empirical public finance perspective. First, I analyse the effects of strong demographic shifts by considering how the East German Länder responded to the rather dramatic decline in the number of students in primary schools (1993-2002). The demographic shock is a consequence of collapsing birth rates after German Reunification. Previous results from the literature, which rely on data from rather stable demographic periods, suggest that public resources are incompletely adjusted to shrinking cohort size such that large reductions in the student population translate into important increases in spending per student and not in significant reductions of public resources allocated to education. Evidence from a panel of 5 East German Länder over the 1993-2006 period suggests, however, that resource adjustments have been considerable, especially in the years when student cohorts were actually decreasing. Adjustments have been less tight in the period when student numbers stagnated such that the 50% decrease in cohort size has translated into a 25% increase in the teacher/student-ratio. Second, I test whether partisan theory can help to explain the practise of ability-tracking in West Germany. The analysis starts from the empirical observation that in the German education system – where tracking is practised very early compared to other OECD countries – the correlation of parent’s education or income with their children’s track choices is very strong. Thus, students whose parents have a high-education background have significantly higher probabilities of attending a high-ability track. Partisan theory states that political parties when in office pursue the interests of their members and electoral constituencies. Political parties representing highly educated households should therefore support the practise of ability-tracking and advocate higher education spending on the tracks for good students. Evidence from a panel of 10 West German Länder over the 1979-2006 period suggests that German political parties support tracking if they represent high-education households and oppose tracking if they represent lower educated households. The results also suggest that political parties tend to allocate public resources towards the track in which party members’ or party electorate’s offspring is overrepresented. Third, research-oriented higher education in Germany is almost exclusively provided by the public sector, which highlights the importance of measuring university cost efficiency, because market exit and entry – which ensure efficient resource use in the private sector – virtually do not exist (see e.g., Hanushek, 2002). Based on a panel of 70 German public universities over the 1998-2003 period I provide evidence about the factors that benefit efficient resource use in the German higher education landscape. I analyse whether relatively liberal university regulation improves the cost efficiency of public universities as suggested in the literature (see Aghion et al., 2008). The results show that liberal university regulation indeed contributes to more efficient use of resources. Moreover, I find that a prosperous private economic environment seems to reduce university costs