Should Suburbs Help Their Central City?

Abstract

Should suburbs help finance the core public services of their central city? Previous arguments for such 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 for such assistance, one now stressed by many large city mayors. 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 directly or indirectly 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, calibrated to the Philadelphia MSA. Our results suggest each suburban family in an average MSA will find it in their economic self-interest to pay from $100 to $250 per year to their central cities to facilitate the reform of weak central city fiscal institutions.