How Should Suburbs Help Their Central Cities?

34 Pages Posted: 28 Sep 2004

See all articles by Andrew Haughwout

Andrew Haughwout

Federal Reserve Bank of New York

Robert P. Inman

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Date Written: May 2004


In this paper, we study the question whether suburbs should help finance the core public services of their central cities. We review three arguments that have been offered in favor of suburbs' fiscal assistance to their central cities. First, the central city provides public services that benefit suburban residents. Second, the central city may provide redistributive services to low-income central city residents that benefit suburbanites with redistributive preferences for such transfers. For efficiency, suburbanites should contribute toward such services in proportion to the benefits they enjoy. Third, the central city's private economy may be an efficient production center because of agglomeration economies, that is, increasing returns, in the production of goods and services consumed by suburban residents. Distributive city finances - for example, rent-seeking - may undermine those economies by driving businesses or residents from the city. Suburbanites may wish to contribute toward the costs of such fiscal redistribution if those contributions reduce the number of firms and residents leaving. We examine the effects of suburban transfers in a structural model of a metropolitan economy that is consistent with the last of these explanations and with the city-suburban interdependence literature.

Keywords: metropolitan areas, fiscal policy, taxes, agglomeration

JEL Classification: H7, R3

Suggested Citation

Haughwout, Andrew F. and Inman, Robert P., How Should Suburbs Help Their Central Cities? (May 2004). Available at SSRN: or

Andrew F. Haughwout (Contact Author)

Federal Reserve Bank of New York ( email )

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Robert P. Inman

University of Pennsylvania - Finance Department ( email )

The Wharton School
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National Bureau of Economic Research (NBER)

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