Do Small Governments Make Bad Neighbors

The 'Race to the Bottom' theory suggests that local governments might be reluctant to adopt policies that are helpful towards poorer citizens out of fear of attracting poorer residents from nearby municipalities. Likewise, policies that are helpful to the poor may be costly and can lead to an increase in taxes that may drive away wealthier residents. Municipalities in which a majority of citizens are of one race or economic class, and in which citizens have a distaste for people unlike themselves might also wish to adopt policies encouraged to keep people of different races or classes out. As governments become more centralized and represent larger areas we might expect that citizens become less willing to move in or out of the (larger) jurisdiction of the government, so the 'Race to the Bottom' effect should become weaker, and governments may be more willing to adopt redistributive policies. Similarly, governments with larger jurisdictions are likely to find it more difficult to encourage undesired residents to move out, and might be less willing to adopt costly policies intended to do so. This paper constructs a measure of government centralization within counties in the United States, and finds that counties with more centralized governments do indeed spend significantly more on redistributive polices. This relationship appears robust, and does not appear to be explained by regional differences, rural/urban differences or differences in racial or economic characteristics. On the other hand, I do not find consistent evidence that any differences in policies cause less racial or economic segregation in areas covered by centralized governments. 1 I would like to thank Robert Ellickson for his help developing and crystallizing the ideas explored in this paper. Thanks are also due to Rick Brooks, John Donohue, Keith Chen, Heather Tookes and Fabian Lange for useful discussions. All errors are my own. Hosted by The Berkeley Electronic Press