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This dissertation consists of two studies on how local governments respond to changing economic environments in terms of public policy in the United States. The first study I explore how changes in the local economic environment affect the provision of public goods by local governments through two approaches to shocks: import shocks from China and changes in the manufacturing industry in the United States. I extend the Feler and Senses (2017) framework about import shocks to allow for a more extensive analysis of heterogeneity and find that aggregation affects their results in two critical dimensions. Governments in highly-populated areas responded differently than those in the remaining, presumably because of Tiebout competition between cities and comparable competitive suburbs. Further, I find that central cities in the largest commuting zones respond to this decline by reducing their infrastructure spending, preparing for further economic decline. The suburbs, in contrast, appear to recognize that the reduction is temporary, as the continued decentralization of large urban areas suggests a suburban recovery from the temporary decline. I also show that the Bartik-type instrument for manufacturing industry changes yields results similar to the China shock approach and has the advantage of being able to cover more time periods. The second study aims to analyze the fiscal decision-making of central cities in the United States within the broader context of their respective metropolitan areas. Specifically, we investigate how central city governments respond to taste innovations, as evidenced by the fiscal choices made by suburban governments in the surrounding areas. In our study, we draw upon insights from urban economics, which posit that central city governments possess access to substantial land rents that suburban governments lack. To assess these dynamics, we employ panel data encompassing the 56 largest cities in the U.S. over 46 years. Utilizing instrumental variable (IV) models, we estimate the factors influencing central city taxes and expenditures across different categories by considering the choices made by suburban governments and proxies by the other suburban governments within the same states. Furthermore, we employ a Bartik instrument framework to measure the changes in economic environments to model fiscal responses from central city governments. Our findings suggest that, central cities have rent extraction behavior and we also observe that some of these rents are allocated to support budgets to assist low-income households.

economic environment, local government behavior