Abstract: This study examines the effectiveness of the Low-Income Housing Tax Credit (LIHTC) program across racially segregated neighborhoods in Cook County, Illinois, focusing on the crowd-out effect. Using a robust staggered difference-in-differences approach, I assess whether the LIHTC development substitutes unsubsidized supply of rental housing, and if this substitution varies by racial type of neighborhoods. The findings reveal a 34% decline in unsubsidized housing unit supply following LIHTC development in Black neighborhoods, while a 6% increase is observed in White neighborhoods. The crowd-out in Black neighborhoods last until the fourth year after LIHTC development. I propose a theoretical model where low-quality initial building structure decreases production productivity, which in turn reduce supply. The model further predicts developers working with low-quality building structure has flatter supply curve and making them subject to larger crowding-out by LIHTC. My empirical finding confirms this theoretical prediction.

Key words: Housing Supply, Tax Credit, Crowd-out, Racial Segregation