How to Make the Metropolitan Area Work? Neither Big Government, Nor Laissez-Faire

Abstract

We study how political boundaries and fiscal competition interact with the labor and land markets to determine the economic structure and performance of metropolitan areas. Contrary to general belief, institutional fragmentation need not be welfare-decreasing, and commuting from the suburbs to the central city is not wasteful. Thus, the institutional and economic limits of the central city do not coincide at the social optimum. Under tax competition, the central business district is too small. The dispersion of jobs is increased when suburbanite workers consume the public services supplied by the central city. This indicates the need for some metropolitan governance.

Keywords: administrative boundary, economic boundary, fiscal competition, local labor markets, metropolitan area, suburbanization

JEL Classification: H41, H71, R12