MANAGEMENT OF LARGE CITY REGIONS: DESIGNING EFFICIENT METROPOLITAN FISCAL POLICIES*

ABSTRACT Metropolitan areas (MSAs) are the location of the great majority of economic activity in the United States, and the largest produce a disproportionate share of output. It is thus critical for the economy's long‐term growth that large cities operate efficiently. In this paper, we briefly review the sources of productivity growth in cities. We then discuss the costs and benefits of political decentralization in large MSAs. After documenting the interdependence of the suburbs and central cities in large MSA, we develop a model that embodies many of the empirically verified aspects, including agglomeration economies and public goods. After calibrating the model to actual outcomes in a representative city, we simulate the effects of various kinds of fiscal redistributions. We conclude that, under the model, some kinds of fiscal redistributions can provide benefits in both cities and suburbs.