Should Suburbs Help Their Central City?

Abstract

Previous arguments for suburb-to-city fiscal assistance have stressed spillovers from city services to suburban residents or the fact that suburban residents (should?) care about their city's poor. We explore the validity of a third possible argument: Suburban residents - even those who never use city services nor care about the city's poor - may wish to support the city's budget if that budget contributes to the productive efficiency of the city's private economy and if suburban residents consume the output of city firms. The analysis here presents first-difference regressions of city and suburban home values, city and suburban population, and city and suburban incomes for 217 MSA's for the decade 1980-1990. We find that weak city fiscal institutions and increases in the rate of city poverty depress both the city's and the suburb's private economies. The econometric results are replicated in a general equilibrium model of an open MSA economy. Our results suggest each suburban family in an average MSA will find it in their economic self-interest to pay from $100 to over $200 per year to cover the added fiscal costs imposed by weak fiscal institutions or increases in the rate of city poverty.

Keywords: Metropolitan areas, fiscal policiy, firm location

JEL Classification: H7, H2, R5