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This study provides empirical evidence on how institutional differences influence school budget decisions by using panel data from 178 K-12 New Jersey school districts for the period 1996 to 2007. The findings obtained by the Newey-West model, correcting heteroskedasticity and serial correlation, support our hypothesis that school districts with elected school boards (Type II districts) are more likely to be effective at lowering school spending than ones with appointed school boards (Type I districts). Viewing school systems through the lens of new institutional economics, this study argues that institutional differences in governance are critical in leading to differences in budgetary decisions by affecting incentive structures faced by public officials, along with transaction costs and agency costs.Points for practitionersTo date, the issue of the impact of institutional differences on local budgetary decisions has been an ongoing topic of debate among many scholars and practitioners in the public administration field. This implies that as an effective incentive structure as well as constraint mechanism, direct electoral institutions in school districts can be a valuable tool to control growing education spending by placing clear accountability on school boards in shaping school budget decisions. Policy makers should consider feasible strategies accompanied by institutional changes in a situation in which local governments are challenged to manage their budget effectively under fiscal stress.