This article begins by reviewing the main body of evidence about the effectiveness of resources devoted to schools. It then discusses some of the central implications for policy and for economic research. The implications for educational policy draw heavily on the discussion of the Panel one the Economics of Education Reform (PEER), a group of economists who met over a four-year period to discuss economic aspects of educational investments. Those recommendations are only sketched here, but are detailed in its report, Making Schools Work (Hanushek and others, 1994).

This paper attempts to reconcile the contradictory findings in the debate over school resources and school effectiveness by highlighting the role of aggregation in the presence of omitted variables bias. While data aggregation for well-specified linear models yields unbiased parameter estimates, aggregation alters the magnitude of any omitted variables bias. In general, the theoretical impact of aggregation is ambiguous. In a very relevant special case where omitted variables relate to state differences in school policy, however, aggregation implies clear upward bias of estimated school resource effects. Analysis of High School and Beyond data provides strong evidence that aggregation inflates the coefficients on school resources. Moreover, the pattern of results is not consistent with an errors-in-variables explanation, the alternative explanation for the larger estimated impact with aggregate estimates. Since studies using aggregate data are much more likely to find positive school resource effects on achievement, these results provide further support to the view that additional expenditures alone are unlikely to improve student outcomes.