Revisiting the theory of revenue diversification: Insights from an empirical analysis of municipal budgetary solvency

How does revenue diversification shape the budgetary solvency of city governments? Previous studies informed by public choice/fiscal illusion perspective suggest that leads to unsustainable government expansion and imbalance. In contrast, organizational adaptation/modern portfolio theory suggests enables prepare for external fiscal shocks. We use different measures rely on audited financial information develop general fund-based government-wide more than 500 midsized large cities in United States from 2006 2012. Addressing omitted variable bias, results econometric analyses indicate type matters. Specifically, diversifying non-tax sources improves as indicated higher operating ratio reserves, whereas within tax structure produces opposite effects. The contradictory point need rethink current theories diversification, which do not recognize ways structures can be broadened, how these produce distinct effects performance. lay out critical first step clarifying further developing a nuanced proposing three causal mechanisms outlining pathways through types influence budget outcomes.