Abstract
We revisit the claim that ethnic heterogeneity—the degree to which different ethnic groups make up the population—reduces local government spending on various public goods. Our analysis suggests that heterogeneity does not necessarily reduce local public spending due to two factors: (1) the low price elasticity of demand for local public goods and (2) the substitution between public goods. Using data from American cities and school districts from 2000 to 2010, we find that ethnic heterogeneity has offsetting positive and negative effects on various types of local government spending. Our findings imply that local governments respond to an increase in ethnic heterogeneity by rebalancing local public spending—for instance, adopting a policy that reallocates resources from roads to police and fire protection.