Price and Prejudice: Preferences and Incentives in the Dynamics of Racial Residential Segregation

Schelling’s classic tipping model shows how white residents may leave a neighborhood once the minority share exceeds their personal tolerance threshold, causing rapid segregation after only a small increase beyond a tipping point. Yet this framework abstracts from two forces that may be central to tipping: expectations and housing prices. This paper develops an augmented model in which white and minority renters and homeowners interact both spatially, by sharing a neighborhood, and economically, through rents and house prices. The model incorporates heterogeneous preferences and expectations, generating dynamic segregation and allowing forward-looking behavior to influence tipping. Numerical simulations show that housing markets amplify tipping through the distinct incentives facing owners and renters. Forward-looking white homeowners are more likely to exit a tipping neighborhood and less likely to enter one, as expected house price declines raise the opportunity cost of ownership. White renters, by contrast, benefit from falling rents and remain more willing to stay and enter. The model therefore predicts larger tipping effects on white homeowners than renters, stronger racial transition in owner-dominated neighborhoods, and steeper declines in house prices than in rents. To test these predictions, the paper extends the empirical framework of Card et al. (2008) to analyze neighborhood change from 1970 to 2010 across a large set of US cities. The results confirm that, conditional on tipping, the white homeowner population declines significantly more than the white renter population, and neighborhoods with higher initial homeownership rates experience faster racial change and larger house price declines. These findings suggest that neighborhood tipping, often attributed to social dynamics alone, is substantially amplified by market forces.