The public goods problem is linked to another, almost insurmountable problem: ethnic divisions. Ethnic conflict is an important determinant of local public finances.
Alesina, Baqir, and Easterly present a model that links heterogeneity of preferences across ethnic groups in a city to the amount and type of public good the city supplies.
Results show that the shares of spending on productive public goods—education, roads, sewers, and trash pickup—in U.S. cities (metro areas/urban counties) are inversely related to the city's (metro area's/county's) ethnic fragmentation, even after controlling for other socioeconomic and demographic determinants.
They conclude that ethnic conflict is an important determinant of local public finances. In cities where ethnic groups are polarized, and where politicians have ethnic constituencies, the share of spending that goes to public goods is low.
Their results are driven mainly by how white-majority cities react to varying minority-group sizes. Voters choose lower public goods when a significant fraction of tax revenues collected from one ethnic group is used to provide public goods shared with other ethnic groups.
This paper—a product of Macroeconomics and Growth, Development Research Group—is part of a larger effort in the group to study the political economy of policymaking. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Kari Labrie, room MC3-456, telephone 202-473-1001, fax 202-522-1155, Internet address klabrie@worldbank.org. The authors may be contacted at alesina@mit.edu, baqir@econ.berkeley.edu, or weasterly@worldbank.org. (38 pages)
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