Racial Heterogeneity and Local Government Finances: Evidence from the Great Migration

Is racial heterogeneity responsible for the distressed financial conditions of US central cities and for their limited ability to provide even basic public goods? If so, why? I study these questions in the context of the first wave of the Great Migration (1915-1930), when more than 1.5 million African Americans moved from the South to the North of the United States. Black inflows and the induced white outflows ("white flight") are both instrumented for using, respectively, pre-migration settlements and their interaction with MSA geographic characteristics that affect the cost of moving to the suburbs. I find that black in-migration imposed a strong, negative fiscal externality on receiving places by lowering property values and, mechanically, reducing tax revenues. Unable or unwilling to raise tax rates, cities cut public spending, especially in education, to meet a tighter budget constraint. While the fall in tax revenues was partly offset by higher debt, this strategy may, in the long run, have proven unsustainable, contributing to the financially distressed conditions of several US central cities today.