Tiebout Sorting and Neighborhood Stratification

Tiebout’s classic 1956 paper has strong implications regarding stratification across and within jurisdictions, predicting (in the simplest instance) a hierarchy of internally homogeneous communities, ordered by household income. In practice, urban areas tend to exhibit varying degrees of within-neighborhood mixing, likely attributable to departures from several standard Tiebout assumptions – the fact that households are influenced by more than public goods packages when deciding where to live, the heterogeneous nature of the housing stock, and the role of employment geography, given commuting costs are non-zero. To shed light on the way these factors influence observed residential mixing, this paper quantifies the separate contributions of employment geography and housing preferences in reducing neighborhood stratification. It does so using an equilibrium sorting model, estimated with rich Census micro-data. Simulations based on the model using credibly-identified demand estimates show that counterfactual reductions in commuting costs lead to marked increases in education segregation and, to a lesser degree, increases in income segregation, as households now find it easier to locate in neighborhoods with similar households. In contrast, turning off preferences for housing characteristics actually reduces income segregation, indicating that the nonuniform distribution of housing serves to stratify households based on ability-to-pay. Related, we show that differences in housing also help accentuate differences in the consumption of local amenities.