Urban Income Inequality: An Examination of Municipal Market Conditioning

• In Event: Confronting Urban Inequalities

Abstract

As Peterson (1981) argued, cities confront serious dilemmas if they wish to redistribute. If a city redistributes excessively, residents may opt to vote with their feet and leave, and cities often vie for residents, especially wealthy ones. In order to ameliorate income inequality, rather than using explicit redistribution, cities may opt to use market conditioning mechanisms-⎯how the government “shap[es] the behavior of private actors in the market” (Morgan and Kelly 2013, p. 672) to improve income inequality. Market conditioning policies include education spending, health and hospital expenditures, and public transportation.

Pre-existing scholarship demonstrates that market conditioning can help ameliorate income inequality in the comparative context. Analyses of Latin American countries have shown that improving infrastructure leads to more and better opportunities for the poor to secure employment (Calderon and Chong 2004; Escobal and Ponce 2002). In the American context, Kelly (2005) finds that more liberal policies lead to less pre-redistribution and post-redistribution inequality in the states, suggesting that both market conditioning and explicit redistribution play a role in shaping income inequality. Yet little work has assessed if and how cities employ market conditioning mechanisms to reduce income inequality.

Instead, there is a rich literature assessing how income inequality affects the generosity of municipal spending. The common expectation is that more heterogeneous societies (i.e., those with greater income inequality) will spend less on public goods provision because wealthier households can privately compensate for the lack of public goods provision (Epple and Romano 2006). More basically though, heterogeneous societies have difficulty agreeing on the distribution of public goods because of the variety of preferences (Benabou 1996). In contrast, Boustan et al. (2013) find that income inequality leads to more generous municipal public goods provision, which is consistent with Corcoran and Evans’s (2010) conclusion that income inequality leads to greater expenditures in American school districts. Here, I seek to explore the reverse causal mechanism: how municipalities can spend⎯on both explicit redistribution and market conditioning⎯to affect income inequality.

First, using municipal Gini indices and the Census of Governments public finance file, I create a measure of human capital spending and subsequently test how municipal spending affects income inequality. As a robustness check, I employ Boustan et al.’s (2013) data and find similar results. Preliminary results suggest that the explicit redistribution that municipalities employ has a marginal effect on income inequality at best. In contrast, municipalities with significant spending on market conditioning policies manage to reduce income inequality. Ultimately, this suggests that if local governments avoid redistribution, but still wish to mitigate income inequality, municipal governments can alternatively invest in market conditioning mechanisms.

Author

• Markie McBrayer, University of Idaho