Institute Working Paper 11

Rethinking Detroit

Raymond Owens III | Federal Reserve Bank of Richmond
Esteban Rossi-Hansberg | Opportunity and Inclusive Growth Institute and Princeton University
Pierre-Daniel Sarte | Federal Reserve Bank of Richmond

Published August 7, 2018

We study the urban structure of the City of Detroit. Following many decades of decline, the city’s current urban structure is clearly not optimal for its size, with a business district immediately surrounded by a ring of largely vacant neighborhoods. We propose a model with residential externalities that features multiple equilibria at the neighborhood level. In particular, developing a residential area requires the coordination of developers and residents, without which it may remain vacant even if its fundamentals are sound. We embed this mechanism in a quantitative spatial economics model and use it to rationalize current city allocations. We then use the model to evaluate existing strategic visions to revitalize Detroit, and to design alternative plans that rely on ‘development guarantees’ to yield better outcomes. The widespread effects of these policies underscore the importance of using a general equilibrium framework to evaluate policy proposals.

DOI: https://doi.org/10.21034/iwp.11

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