Association for Public Policy Analysis & Management

Scholars have long argued that heterogeneous communities experience collective action problems in providing public goods. In particular, when new groups arrive to a society and demand access to the public goods, those who enjoyed the existing collective benefits may not want to contribute to and share them anymore. This class of research is grounded in theories of social psychology and political economy, which posit that, distinct preferences across groups make public choice an in-group favoritism and out-group bias. Applying this thesis to race and ethnicity, many economists and political scientists have found racial diversity as a driver of reduced provision of public goods. Recent research further illustrates that segregation and/or income inequality between racial groups is a powerful factor that reduces public goods provision. However, much of previous work suffers from endogeneity, that of self-selection problem in research design. Without addressing this issue of sorting, a causal relationship between diversity and reduced public goods is not warranted. In this paper, we focus on immigrants from Mexico to the United States and explore the extent to which Mexican immigration—which has increased dramatically in the United States since the 1960s—has influenced local fiscal policy. Our research design allows us to use birth cohort and network instruments to address the methodological limitations embedded in existing scholarship and estimate the causal effect of immigration on municipal indebtedness. The preliminary results indicate that an influx of immigration has increased municipal borrowing in urban areas, which holds an important implication on local political economy and municipal finance.