Community Homogeneity and Revealed Preferences for Environmental Goods

I. INTRODUCTION Social scientists have examined election results to understand the demand for public goods. Deacon and Shapiro (1975), Fisehel (1979), Matsusaka (1992), and Dubin, Kiewiet, and Noussair (1992) are among the seminal papers in this literature. The analysis of referendum data is particularly helpful to learn about the preferences for environmental quality (Kahn and Matsusaka 1997; Kahn 2002). The natural environment is a public good and we must infer willingness to pay through surveys or with indirect methods such as hedonic price and averting expenditures models. Examining voting on referenda is another approach. The election process allows voters to become informed about the income and price effects of their decision so that an individual will support a ballot proposition if her/his expected benefits from the proposal are equal to or greater than the cost. Rather than observing individual voting choices, researchers typically have access to voting results aggregated at the county, city, or census tract level. Because ballot proposals usually generate differential benefits and costs across communities according to the communities' socioeconomic profile, researchers are able to exploit variability of both voting patterns and socioeconomic factors to examine preferences for public goods. Researchers control for variables that reflect how a proposal might influence a community's welfare--variables such as median household income, shares of individuals in different occupations, and educational attainment. The models also include the share of the population of a given race or social class if the public good creates differences in well-being among groups, for example, if a proposal provides environmental amenities and minorities and the poor are disproportionally exposed to environmental hazards. However, there is consistent evidence in the social sciences that there are factors beyond population shares that relate to the social structure of a community and that influence economic outcomes. In particular, research shows that racial and class heterogeneity can matter for the provision of public goods. In this literature, researchers divide a population into exclusive groups (based on race, ethnicity, educational attainment, etc.) and construct an index by adding the squared shares of the groups and subtracting the sum from one. If there is only one group, the population is perfectly homogeneous and the index of heterogeneity is equal to zero. On the other hand, a population of many small groups gets an index of heterogeneity that approaches one (Vigdor 2002). (1) Using this measure, Alesina, Bac-fir, and Easterly (1999) show that the local provision of public goods is lower in more heterogeneous communities. Otken and Okonkwo-Osili (2004) find a negative relationship between ethnic diversity and participation in community groups. Alesina and La Ferrara (2000, 2002) find that racial diversity in American cities is negatively correlated with participation in social activities and with the propensity to trust other people. Costa and Kahn (2003) and Glaeser et al. (2000) find that diversity influences levels of trust. Other papers examining the links between community composition and the provision of public goods include Sampson, Raudenbush, and Earls (1997), Vigdor (2004), and Alesina and La Ferrara (2005). Of several nonexcusive explanations for these results, three mechanisms are relevant for the public provision of environmental quality. First, different groups may have different spending priorities and preferences about which goods should be provided publicly. Second, heterogeneity can increase the costs of coordinating and defining common policy goals. Third, heterogeneity can reduce the provision of a public good if individuals are averse to mixing: even when different groups have the same preference for a given public good, greater heterogeneity can lower the provision of the good if its use requires contact and sharing across groups. …