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Identifying Individual and Group Effects in the Presence of Sorting: A Neighborhood Effects Application

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Patrick Bayer
Stephen L. Ross

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Abstract

Researchers have long recognized that the non-random sorting of individuals into groups generates correlation between individual and group attributes that is likely to bias naïve estimates of both individual and group effects. This paper proposes a non-parametric strategy for identifying these effects in a model that allows for both individual and group unobservables, applying this strategy to the estimation of neighborhood effects on labor market outcomes. The first part of this strategy is guided by a robust feature of the equilibrium in vertical sorting models - a monotonic relationship between neighborhood housing prices and neighborhood quality. This implies that under certain conditions a non-parametric function of neighborhood housing prices serves as a suitable control function for the neighborhood unobservable in the labor market outcome regression. This control function transforms the problem to a model with one unobservable so that traditional instrumental variables solutions may be applied. In our application, we instrument for each individual’s observed neighborhood attributes with the average neighborhood attributes of a set of observationally identical individuals. The neighborhood effects model is estimated using confidential microdata from the 1990 Decennial Census for the Boston MSA. The results imply that the direct effects of geographic proximity to jobs, neighborhood poverty rates, and average neighborhood education are substantially larger than the conditional correlations identified using OLS, although the net effect of neighborhood quality on labor market outcomes remains small. These findings are robust across a wide variety of specifications and robustness checks.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12211.

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Date of creation: May 2006
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Handle: RePEc:nbr:nberwo:12211

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Find related papers by JEL classification:
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
R14 - Urban, Rural, and Regional Economics - - General Regional Economics - - - Land Use Patterns

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Shihe Fu & Stephen L. Ross, 2007. "Wage Premia in Employment Clusters: Does Worker Sorting Bias Estimates?," Working papers 2007-26, University of Connecticut, Department of Economics, revised Dec 2009. [Downloadable!]
  2. Yannis M. Ioannides & Giorgio Topa, 2009. "Neighborhood Effects: Accomplishments and Looking Beyond Them," Discussion Papers Series, Department of Economics, Tufts University 0736, Department of Economics, Tufts University. [Downloadable!]
  3. Ross, Stephen L. & Zenou, Yves, 2008. "Are Shirking and Leisure Substitutable? An Empirical Test of Efficiency Wages based on Urban Economic Theory," CEPR Discussion Papers 6841, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Dante Contreras & Daniela Zapata & Diana Kruger & Marcelo Ochoa, 2007. "The Role of Social Networks in the Economic Opportunities of Bolivian Women," RES Working Papers 3240, Inter-American Development Bank, Research Department. [Downloadable!]
  5. Stephen L. Ross, 2009. "Social Interactions within Cities: Neighborhood Environments and Peer Relationships," Working papers 2009-31, University of Connecticut, Department of Economics. [Downloadable!]
  6. Steven N. Durlauf & Yannis M. Ioannides, 2009. "Social Interactions," Discussion Papers Series, Department of Economics, Tufts University 0739, Department of Economics, Tufts University. [Downloadable!]
  7. Dante Contreras & Daniela Zapata & Diana Kruger & Marcelo Ochoa, 2007. "El papel de las redes sociales en las oportunidades económicas de las mujeres de Bolivia," RES Working Papers 3241, Inter-American Development Bank, Research Department. [Downloadable!]
  8. Claire Dujardin & Florence Goffette-Nagot, 2005. "Neighborhood effects, public housing and unemployment in France," Post-Print halshs-00180046_v1, HAL. [Downloadable!]
    Other versions:
  9. Hoyt Bleakley & Jeffrey Lin, 2007. "Thick-market effects and churning in the labor market: evidence from U.S. cities," Working Papers 07-23, Federal Reserve Bank of Philadelphia. [Downloadable!]
  10. Bruce A. Weinberg, 2007. "Social Interactions with Endogenous Associations," NBER Working Papers 13038, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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