Racial Heterogeneity and Local Government Finances: Evidence from the Great Migration

67 Pages Posted: 26 Jul 2018 Last revised: 19 Aug 2019

Date Written: August 19, 2019

Abstract

Between 1915 and 1930, during the First Great Migration, more than 1.5 million African Americans migrated from the South to the North of the United States, altering the racial profile of several northern cities for the first time in American history. I exploit this episode to study how an increase in racial heterogeneity affects the provision of public goods and city finances. I predict black in-migration by interacting 1900 settlements of southern born blacks across northern cities with variation in outmigration from the South after 1910. I find that black inflows had a strong, negative impact on both public spending and tax revenues in northern cities. The decline in tax revenues was not due to cities decision to cut tax rates, but was entirely driven by a reduction in property values. These findings suggest that the housing market response to black arrivals imposed a negative fiscal externality to receiving cities that, unable or unwilling to raise taxes, were forced to cut spending. Consistent with this interpretation, cities did not change the allocation of spending across categories, while the negative effects of black in-migration were smaller when controlling for the (predicted) white outflows triggered by black arrivals.

JEL Classification: H41, J15, N32

Suggested Citation

Tabellini, Marco, Racial Heterogeneity and Local Government Finances: Evidence from the Great Migration (August 19, 2019). Harvard Business School BGIE Unit Working Paper No. 19-006. Available at SSRN: https://ssrn.com/abstract=3220439 or http://dx.doi.org/10.2139/ssrn.3220439

Marco Tabellini (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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