The Macroeconomic Effects of Neighborhood Policies: a Dynamic Analysis

We study the macroeconomic effects of neighborhood-specific policies in a general equilibrium model of a city with endogenous residential sorting and educational investment. A key feature of the model is the presence of endogenous local spillovers that depend on the distribution of families across neighborhoods. We analyze three policies: a housing-voucher policy inspired by the MTO program, which enables poor families to relocate to low-poverty neighborhoods; a place-based transfer (PBT) policy that provides monetary transfers to families in poor neighborhoods; and a place-based investment (PBI) policy that invests resources in local institutions, such as public schools, to directly enhance local spillovers. We find that the MTO policy generates substantial income gains for children of recipient families, but scaling up the program dampens these gains and induces large welfare losses for non-recipients. By contrast, the PBT policy delivers larger average welfare gains but is less effective in reducing inequality and segregation. Finally, the PBI policy produces smaller short-run effects but, over time, resolves the trade-off by raising average welfare while simultaneously reducing inequality, lowering segregation, and improving intergenerational mobility.