The Individuals with Disabilities Education Act mandates that states and localities provide appropriate education for all students identified as having special needs. States have responded by funding special education using several different mechanisms. Two of these mechanisms are “census” approaches (in which states estimate how many children should have special needs based on student characteristics andallocate money to localities based on these predictions) and “marginal subsidy” approaches(in which states pay localities a percentage of the amount of money that the localities say they spend on special education).

a. It has been found that the marginal subsidy approach leads to more students being classified by their localities as needing special education than does the census approach.

Why might this be the case?

b. Suppose that you analyze cross-sectional data on the level of subsidy and the number of students enrolled in special education. You find that, in cross-section, states that reimburse localities the most for their special education students tend to have the highest rates of students enrolled in special education. Think of one possible problem with this analysis.