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How should suburbs help their central cities?

  • Andrew F. Haughwout
  • Robert P. Inman

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.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 186.

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Date of creation: 2004
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Handle: RePEc:fip:fednsr:186
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  1. Robert W. Helsley & William C. Strange, 1997. "Limited Developers," Canadian Journal of Economics, Canadian Economics Association, vol. 30(2), pages 329-48, May.
  2. Rosenthal, Stuart S. & Strange, William C., 2001. "The Determinants of Agglomeration," Journal of Urban Economics, Elsevier, vol. 50(2), pages 191-229, September.
  3. Roback, Jennifer, 1982. "Wages, Rents, and the Quality of Life," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1257-78, December.
  4. Helsley, Robert W. & Strange, William C., 1994. "City formation with commitment," Regional Science and Urban Economics, Elsevier, vol. 24(3), pages 373-390, June.
  5. Haughwout, Andrew F., 2002. "Public infrastructure investments, productivity and welfare in fixed geographic areas," Journal of Public Economics, Elsevier, vol. 83(3), pages 405-428, March.
  6. Gyourko, Joseph & Tracy, Joseph, 1991. "The Structure of Local Public Finance and the Quality of Life," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 774-806, August.
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