Ethnic Polarization and Municipal Spending

Abstract

Ethnic heterogeneity has been found to affect government spending and tax outcomes at all levels of government. While heterogeneity may sometimes be productivity enhancing because of the value of differing experiences and knowledge, it may also lead to social conflict and rent seeking. The goal of the present paper is to examine the effect of ethnic heterogeneity on overall spending and taxes for municipalities in the U.S., as well as for certain productive, protective, and redistributive services. The original contribution of the paper is the use of a standard polarization index as a measure of heterogeneity, which then allows for a comparison with a fractionalization index. Briefly, the main result of the paper is that ethnic heterogeneity generally has a positive effect on municipal spending and taxes as well as on some specific spending categories; the evidence when using the polarization measure is somewhat stronger than when using the fractionalization measure (H7, R1, J15).