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An Equilibrium Model of Sorting in an Urban Housing Market: A Study of the Causes and Consequences of Residential Segregation

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  • Patrick Bayer
  • Robert McMillan
  • Kim Rueben

Abstract

This paper presents a new equilibrium framework for analyzing economic and policy questions related to the sorting of households within a large metropolitan area. At its heart is a model describing the residential location choices of households that makes explicit the way that individual decisions aggregate to form a housing market equilibrium. The model incorporates choice-specific unobservables, and in the presence of these, a general strategy is provided for identifying household preferences over choice characteristics, including those that depend on household sorting such as neighborhood racial composition. We estimate the model using restricted access Census data that characterize the precise residential and employment locations of a quarter of a million households in the San Francisco Bay Area, yielding accurate measures of references for a wide variety of housing and neighborhood attributes across different types of household. The main economic analysis of the paper uses these estimates in combination with the equilibrium model to explore the causes and consequences of racial segregation in the housing market. Our results indicate that, given the preference structure of households in the Bay Area, the elimination of racial differences in income and wealth would significantly increase the residential segregation of each major racial group. Given the relatively small fractions of Asian, Black, and Hispanic households in the Bay Area (each ~10%), the elimination of racial differences in income/wealth (or, education or employment geography) spreads households in these racial groups much more evenly across the income distribution, allowing more racial sorting to occur at all points in the distribution – e.g., leading to the formation of wealthy, segregated Black and Hispanic neighborhoods. The partial equilibrium predictions of the model, which do not account for the fact that neighborhood sociodemographic compositions and prices adjust as part of moving to a new equilibrium, lead to the opposite conclusion, emphasizing the value of the general equilibrium approach developed in the paper. Our analysis also provides evidence sorting on the basis of race itself (whether driven by preferences directly or discrimination) leads to large reductions in the consumption of public safety and school quality by all Black and Hispanic households, and large reductions in the housing consumption of upper-income Black and Hispanic households.

Suggested Citation

  • Patrick Bayer & Robert McMillan & Kim Rueben, 2003. "An Equilibrium Model of Sorting in an Urban Housing Market: A Study of the Causes and Consequences of Residential Segregation," Working Papers 03-01, Center for Economic Studies, U.S. Census Bureau.
  • Handle: RePEc:cen:wpaper:03-01
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    File URL: https://www2.census.gov/ces/wp/2003/CES-WP-03-01.pdf
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    References listed on IDEAS

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    Cited by:

    1. Wilbert Grevers & Anne Van der Veen, 2005. "Welfare Economic Aspects of Land Use Planning," ERSA conference papers ersa05p386, European Regional Science Association.
    2. Zhang, Zhaohua & Hite, Diane, 2015. "House Value, Crime and Residential Location Choice," 2015 Annual Meeting, January 31-February 3, 2015, Atlanta, Georgia 196826, Southern Agricultural Economics Association.
    3. Schmidheiny, Kurt, 2006. "Income segregation from local income taxation when households differ in both preferences and incomes," Regional Science and Urban Economics, Elsevier, vol. 36(2), pages 270-299, March.
    4. Constant Tra, 2009. "Title: A Discrete Choice Equilibrium Approach to Valuing Large Environmental Changes," Working Papers 0922, University of Nevada, Las Vegas , Department of Economics.
    5. Schmidheiny, Kurt, 2006. "Income segregation and local progressive taxation: Empirical evidence from Switzerland," Journal of Public Economics, Elsevier, vol. 90(3), pages 429-458, February.
    6. Patrick Bayer & Robert McMillan & Kim Rueben, 2004. "An Equilibrium Model of Sorting in an Urban Housing Market," NBER Working Papers 10865, National Bureau of Economic Research, Inc.
    7. Tra, Constant I., 2010. "A discrete choice equilibrium approach to valuing large environmental changes," Journal of Public Economics, Elsevier, vol. 94(1-2), pages 183-196, February.
    8. Kerry Smith, V. & Sieg, Holger & Spencer Banzhaf, H. & Walsh, Randall P., 2004. "General equilibrium benefits for environmental improvements: projected ozone reductions under EPA's Prospective Analysis for the Los Angeles air basin," Journal of Environmental Economics and Management, Elsevier, vol. 47(3), pages 559-584, May.
    9. Patrick Bayer & Fernando Ferreira & Robert McMillan, 2003. "A Unified Framework for Estimating Preferences for Schools and Neighborhoods," Working Papers 872, Economic Growth Center, Yale University.
    10. Eleanor Brown & Rosanna Smart, 2007. "Racial Differences in Civic Participation and Charitable Giving: The Confounding Effects of Educational Attainment and Unmeasured Ability," The Review of Black Political Economy, Springer;National Economic Association, vol. 34(3), pages 259-271, December.
    11. Bruce A. Weinberg, 2007. "Social Interactions with Endogenous Associations," NBER Working Papers 13038, National Bureau of Economic Research, Inc.

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