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

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Author Info
Patrick Bayer (Duke University)
Stephen L. Ross (University of Connecticut)

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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 naive 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 the canonical vertical sorting model of Epple and Platt (1998), that there is 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. The second part of the proposed strategy uses aggregation to develop suitable instruments for both exogenous and endogenous group attributes. Instrumenting for each individual's observed neighborhood attributes with the average neighborhood attributes of a set of observationally identical individuals eliminates the portion of the variation in neighborhood attributes due to sorting on unobserved individual attributes. The neighborhood effects application is based on 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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Publisher Info
Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2006-13.

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Length: 53 pages
Date of creation: Apr 2006
Date of revision: Jan 2009
Handle: RePEc:uct:uconnp:2006-13

Note: The authors are grateful to the Department of Housing and Urban Development, Federal Reserve Bank of New York, and the Center for Real Estate and Urban Economic Studies at the University of Connecticut for financial support. We are especially thankful to Steven Durlauf for extensive comments on an earlier draft and to William Brock, Fernando Ferreira, Albert Saiz, Holger Sieg, Todd Sinai and seminar participants at UC Berkeley, NYU, Penn-Wharton, and Wisconsin for many helpful comments and suggestions. The research in this paper was conducted while the authors were Special Sworn Status researchers of the U.S. Census Bureau at the Boston Research Data Center (BRDC). The research results and conclusions expressed are those of the authors and do not necessarily reflect the views of the U.S. Census Bureau, the Department of Housing and Urban Development or any other agency of the U.S. Government. This paper was screened to insure that no confidential data are revealed.
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Find related papers by JEL classification:
J6 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies
R2 - Urban, Rural, and Regional Economics - - Household Analysis
C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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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: Agglomeration Economies or Worker Heterogeneity?," Working papers 2007-26, University of Connecticut, Department of Economics, revised Dec 2007. [Downloadable!]
  2. Ross, Stephen L. & Zenou, Yves, 2007. "Are Shirking and Leisure Substitutable? An Empirical Test of Efficiency Wages based on Urban Economic Theory," CEPR Discussion Papers 6128, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. 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!]
  4. 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!]
  5. Bruce A. Weinberg, 2007. "Social Interactions with Endogenous Associations," NBER Working Papers 13038, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. 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!]
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