University of Kentucky UKnowledge Theses and Dissertations--Public Policy and Martin School of Public Policy and Administration Administration 2018 THREE ESSAYS ON LOCAL PUBLIC FINANCE Thomas Daniel Woodbury University of Kentucky, [email protected] Digital Object Identifier: https://doi.org/10.13023/etd.2018.246 Right click to open a feedback form in a new tab to let us know how this document benefits ou.y Recommended Citation Woodbury, Thomas Daniel, "THREE ESSAYS ON LOCAL PUBLIC FINANCE" (2018). Theses and Dissertations--Public Policy and Administration. 27. https://uknowledge.uky.edu/msppa_etds/27 This Doctoral Dissertation is brought to you for free and open access by the Martin School of Public Policy and Administration at UKnowledge. It has been accepted for inclusion in Theses and Dissertations--Public Policy and Administration by an authorized administrator of UKnowledge. For more information, please contact [email protected]. STUDENT AGREEMENT: I represent that my thesis or dissertation and abstract are my original work. Proper attribution has been given to all outside sources. I understand that I am solely responsible for obtaining any needed copyright permissions. I have obtained needed written permission statement(s) from the owner(s) of each third-party copyrighted matter to be included in my work, allowing electronic distribution (if such use is not permitted by the fair use doctrine) which will be submitted to UKnowledge as Additional File. I hereby grant to The University of Kentucky and its agents the irrevocable, non-exclusive, and royalty-free license to archive and make accessible my work in whole or in part in all forms of media, now or hereafter known. I agree that the document mentioned above may be made available immediately for worldwide access unless an embargo applies. I retain all other ownership rights to the copyright of my work. I also retain the right to use in future works (such as articles or books) all or part of my work. I understand that I am free to register the copyright to my work. REVIEW, APPROVAL AND ACCEPTANCE The document mentioned above has been reviewed and accepted by the student’s advisor, on behalf of the advisory committee, and by the Director of Graduate Studies (DGS), on behalf of the program; we verify that this is the final, approved version of the student’s thesis including all changes required by the advisory committee. The undersigned agree to abide by the statements above. Thomas Daniel Woodbury, Student Dr. David E. Wildasin, Major Professor Dr. Eugenia F. Toma, Director of Graduate Studies THREE ESSAYS ON LOCAL PUBLIC FINANCE DISSERTATION A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the Graduate School at the University of Kentucky By Thomas Daniel Woodbury Lexington, Kentucky Director: Dr. David E. Wildasin, Endowed Professor of Public Finance (emeritus) and Professor of Economics (emeritus) Lexington, Kentucky 2018 Copyright c Thomas Daniel Woodbury 2018 ABSTRACT OF DISSERTATION THREE ESSAYS ON LOCAL PUBLIC FINANCE This dissertation seeks to develop the subject of local public finance in a manner consistent with the political economy of local governments. For ease of description, each essay will be discussed briefly. The first essay is titled \The Provision of Generalized Local Public Goods Finan- ced by Distortionary Taxation." This essay models the provision of a local public good that is simultaneously utilized as a public consumption good and a public in- termediate good. Since the public good can simultaneously enter both utility and production functions, it is considered a \generalized public good." This is done to model the provision of infrastructure by sub-federal governments, which is financed with taxes on local residents. A theoretical analysis provides a cost-benefit rule for pu- blic good provision by a rent-maximizing local government facing mobile households. Illustrative calculations of the marginal cost of public funds are provided. Calibrated to U.S. data, the role of intergovernmental transfers on the provision of infrastructure by rent-maximizing local governments is analyzed. Theoretical evidence of the higher responsiveness of local governments to matching grants relative to lump-sum grants is provided. The second essay is titled \The Impact of Local Households' Housing Tenure on Local Public Debt Levels." This essay investigates the relation between local hou- sing tenure and local public debt. It does this by establishing housing tenure as a theoretical basis for the potential differences in how households view public debt. Homeowners capitalize the burden of local public debt into their home value, while renters do not. A hypothesis is generated that an increase in the renter share of hou- seholds in a locality leads to higher levels of local public debt, all else equal. Using an instrumental variable approach, the empirical evaluation shows an increase in the proportion of renters leads to higher levels of public debt in a panel data set of U.S. local governments. Specifically, a one percentage point increase in the percent of renters increases unfunded public debt per household by $400, or about 7% of the average local debt level, and 24% of the county with the median debt level. This relationship is robust across multiple specifications. The third essay is titled \A Spatial Econometric Analysis of Local Households' Housing Tenure on Local Public Debt Levels: Implications for Federalism." This essay extends the model of the second essay by measuring the spatial spillovers using a spatial autoregressive model with autoregressive disturbances. The existence and magnitude of local government spillovers related to local public debt levels are used to inform policy makers at higher levels of government. The analysis identifies possible geographic segmentation of the municipal bond markets and the role of special district debt as a key component of the spatial distribution of local public debt. Additionally, a positive spatial disturbance is found. KEYWORDS: public finance, political economy, fiscal federalism, housing tenure, capitalization Thomas Daniel Woodbury June 28, 2018 THREE ESSAYS ON LOCAL PUBLIC FINANCE By Thomas Daniel Woodbury David E. Wildasin Director of Dissertation Eugenia F. Toma Director of Graduate Studies June 28, 2018 Date Dedicated to my loving wife, Kristen ACKNOWLEDGMENTS First and foremost I wish to recognize the role of my adviser, Dr. David Wildasin. His intellectual influence on me has been key in my development of the material herein. He has encouraged my pursuit of these topics and patiently guided me in becoming familiar with necessary materials and methods. Without him I could not have completed this task, and for that I am grateful. I acknowledge the support of my dissertation committee, a valuable resource to the direction and completion of this work. I appreciate the service provided by each committee member, namely Dr. J.S. Butler, Dr. Dwight Denison, Dr. Jenny Minier, and Dr. Eugenia Toma. Many others have helped me during this time. The Lincoln Institute of Land Policy provided generous support through their dissertation fellowship program. The faculty and staff at the Martin School of Public Policy and Administration and at the department of Economics provided a wonderful academic environment through cour- sework and workshops. The graduate students who I have associated with provided a collegial atmosphere as we each have sought to progress. I would be remiss if I did not mention the support of my family for their encoura- gement. My wife, children, and parents have all been there for me when I needed it most. Finally I recognize the role of my ultimate support, my Lord and Savior, for strengthening me. iii TABLE OF CONTENTS Acknowledgments . iii Table of Contents . iv List of Tables . v List of Figures . vi Chapter 1 Introduction . 1 1.1 The Provision of Generalized Local Public Goods Financed by Distor- tionary Taxation . 1 1.2 The Impact of Local Households' Housing Tenure on Local Public Debt Levels . 2 1.3 A Spatial Econometric Analysis of Local Households' Housing Tenure on Local Public Debt Levels: Implications for Federalism . 3 Chapter 2 The Provision of Generalized Local Public Goods Financed by Dis- tortionary Taxation . 5 2.1 Introduction . 5 2.2 Method . 6 2.3 Results . 11 2.4 Conclusion . 17 2.5 Proofs . 18 Chapter 3 The Impact of Local Households' Housing Tenure on Local Public Debt Levels . 24 3.1 Introduction . 24 3.2 Theory . 25 3.3 Empirical Evaluation . 31 3.4 Conclusion . 54 3.5 Additional Tables and Figures . 55 Chapter 4 A Spatial Econometric Analysis of Local Households' Housing Te- nure on Local Public Debt Levels: Implications for Federalism . 58 4.1 Introduction . 58 4.2 Model . 60 4.3 Results . 65 4.4 Conclusion . 70 Bibliography . 72 Vita . 83 iv LIST OF TABLES 2.1 Marginal Cost of Public Funds for Generalized Public Goods . 15 2.2 Marginal Cost of Public Funds for Generalized Public Goods with Mat- ching Grants . 16 3.1 Act 47 Financially Distressed Municipalities of Pennsylvania . 33 3.2 Notable Fiscally Distressed Localities (South) . 34 3.3 Notable Fiscally Distressed Localities (Midwest) . 34 3.4 Notable Fiscally Distressed Localities (East) . 35 3.5 Notable Fiscally Distressed Localities (Southwest) . 35 3.6 Notable Fiscally Distressed Localities (West) . 36 3.7 Net Debt per Household Results . 52 3.8 Net Debt to Total Revenue Results . 53 3.9 Summary Statistics . 55 4.1 Tabulation of links . 64 4.2 IV Estimation Results . 66 4.3 Spatial GMM Results . 67 4.4 Restricted Sample Spatial GMM Results . 69 v LIST OF FIGURES 3.1 Kernel Density of Renter Share . 46 3.2 Map of Standard Metropolitan Areas from the 1950 Census . 49 3.3 Scatterplot- Renter Share and Net Debt per Household . 56 3.4 Scatterplot- Renter Share and Net Debt to Total Revenue .