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Neighborhood dynamics and the distribution of opportunity

  • Dionissi Aliprantis
  • Daniel Carroll

This paper uses an overlapping-generations dynamic general equilibrium model of residential sorting and intergenerational human capital accumulation to investigate effects of neighborhood externalities. In the model, households choose where to live and how much to invest toward the production of their child’s human capital. The return on the parent’s investment is determined in part by the child’s ability and in part by an externality from the average human capital in their neighborhood. We use the model to test a prominent hypothesis about the concentration of poverty within racially-segregated neighborhoods (Wilson 1987). We first impose segregation on a model with two neighborhoods and match the model steady state to income and housing data from Chicago in 1960. Next, we lift the restriction on moving and compute the new steady state and corresponding transition path. The transition implied by the model qualitatively supports Wilson’s hypothesis: high-income residents of the low-average-human-capital neighborhood move out, reducing the returns to investment in their old neighborhood. Sorting increases citywide human capital, but it also produces congestion in the high-income neighborhood, increasing the average cost of housing. As a result, average welfare decreases by 2.2 percent of steady state consumption, and the loss is greatest for those initially in the low-income neighborhood.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 1212.

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Date of creation: 2012
Date of revision: 01 Oct 2013
Handle: RePEc:fip:fedcwp:1212
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  1. Lundberg, S.J.Startz, R., 1994. "On the Persistence of Racial Inequality," Working Papers 94-07, University of Washington, Department of Economics.
  2. Patrick Bayer & Fernando Ferreira & Robert McMillan, 2007. "A Unified Framework for Measuring Preferences for Schools and Neighborhoods," Working Papers 07-27, Center for Economic Studies, U.S. Census Bureau.
  3. Kremer, Michael, 1997. "How Much Does Sorting Increase Inequality?," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 115-39, February.
  4. Benabou, Roland, 1993. "Workings of a City: Location, Education, and Production," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 619-52, August.
  5. Alejandro Badel, 2010. "Understanding permanent black-white earnings inequality," Working Papers 2010-047, Federal Reserve Bank of St. Louis.
  6. Dionissi Aliprantis, 2011. "Assessing the evidence on neighborhood effects from moving to opportunity," Working Paper 1101, Federal Reserve Bank of Cleveland.
  7. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August.
  8. Bayer, Patrick & Fang, Hanming & McMillan, Robert, 2005. "Separate When Equal? Racial Inequality and Residential Segregation," Working Papers 9, Yale University, Department of Economics.
  9. David M. Cutler & Edward L. Glaeser & Jacob L. Vigdor, 1997. "The Rise and Decline of the American Ghetto," NBER Working Papers 5881, National Bureau of Economic Research, Inc.
  10. Glomm, Gerhard & Ravikumar, B, 1992. "Public versus Private Investment in Human Capital Endogenous Growth and Income Inequality," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 818-34, August.
  11. Durlauf, Steven N, 1996. " A Theory of Persistent Income Inequality," Journal of Economic Growth, Springer, vol. 1(1), pages 75-93, March.
  12. Leah Platt Boustan, 2007. "Was Postwar Suburbanization "White Flight"? Evidence from the Black Migration," NBER Working Papers 13543, National Bureau of Economic Research, Inc.
  13. Hanming Fang & Andrea Moro, 2010. "Theories of Statistical Discrimination and Affirmative Action: A Survey," NBER Working Papers 15860, National Bureau of Economic Research, Inc.
  14. Robert A. Margo, 1990. "Race and Schooling in the South: A Review of the Evidence," NBER Chapters, in: Race and Schooling in the South, 1880-1950: An Economic History, pages 6-32 National Bureau of Economic Research, Inc.
  15. Cutler, David M & Glaeser, Edward L, 1997. "Are Ghettos Good or Bad?," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 827-72, August.
  16. Guerrieri, Veronica & Hartley, Daniel & Hurst, Erik, 2013. "Endogenous gentrification and housing price dynamics," Journal of Public Economics, Elsevier, vol. 100(C), pages 45-60.
  17. repec:att:wimass:9502 is not listed on IDEAS
  18. Eric A. Hanushek & Steven G. Rivkin, 2006. "School Quality and the Black-White Achievement Gap," NBER Working Papers 12651, National Bureau of Economic Research, Inc.
  19. Leah Platt Boustan, 2010. "School Desegregation and Urban Change: Evidence from City Boundaries," NBER Working Papers 16434, National Bureau of Economic Research, Inc.
  20. Epple, Dennis & Romano, Richard E, 1998. "Competition between Private and Public Schools, Vouchers, and Peer-Group Effects," American Economic Review, American Economic Association, vol. 88(1), pages 33-62, March.
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