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Incorporating Neighbourhood Choice in a Model of Neighbourhood Effects on Income

Author

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  • van Ham, Maarten

    () (Delft University of Technology)

  • Boschman, Sanne

    () (Utrecht University)

  • Vogel, Matt

    () (University of Missouri-St. Louis)

Abstract

Studies of neighbourhood effects often attempt to identify causal effects of neighbourhood characteristics on individual outcomes, such as income, education, employment, and health. However, selection looms large in this line of research and it has been repeatedly argued that estimates of neighbourhood effects are biased as people non-randomly select into neighbourhoods based on their preferences, income, and the availability of alternative housing. We propose a two-step framework to help disentangle selection processes in the relationship between neighbourhood deprivation and earnings. We first model neighbourhood selection using a discrete choice framework and derive correction components to adjust parameter estimates in a subsequent neighbourhood effects model for the unequal probability that an individual 'chooses' to live in a particular area. Applying this technique to administrative data from the Netherlands, we find significant interactions between personal and neighbourhood characteristics in the selection model. This confirms individual differences in neighbourhood preferences; individuals non-randomly select into neighbourhoods. The baseline neighbourhood effects model reveals a significant effect of average neighbourhood income on individual income. When we include correction components for the differential sorting of individuals into specific neighbourhoods, the effect of neighbourhood income diminishes, but remains significant. These results suggest that researchers need to be attuned to the role of selection bias when assessing the role of neighbourhood effects on individual outcomes. Perhaps more importantly, the strong, persistent effect of neighbourhood deprivation on subsequent earnings suggests that neighbourhood effects reflect more than the shared characteristics of neighbourhood residents; place of residence partially determines economic well-being.

Suggested Citation

  • van Ham, Maarten & Boschman, Sanne & Vogel, Matt, 2017. "Incorporating Neighbourhood Choice in a Model of Neighbourhood Effects on Income," IZA Discussion Papers 10694, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp10694
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    References listed on IDEAS

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    1. Anne Bolster & Simon Burgess & Ron Johnston & Kelvyn Jones & Carol Propper & Rebecca Sarker, 2007. "Neighbourhoods, households and income dynamics: a semi-parametric investigation of neighbourhood effects," Journal of Economic Geography, Oxford University Press, vol. 7(1), pages 1-38, January.
    2. William Clark & Valerie Ledwith, 2007. "How much does income matter in neighborhood choice?," Population Research and Policy Review, Springer;Southern Demographic Association (SDA), vol. 26(2), pages 145-161, April.
    3. Charles F. Manski, 1993. "Identification of Endogenous Social Effects: The Reflection Problem," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 531-542.
    4. Galster, George, 2002. "An economic efficiency analysis of deconcentrating poverty populations," Journal of Housing Economics, Elsevier, vol. 11(4), pages 303-329, December.
    5. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
    6. Philip Oreopoulos, 2003. "The Long-Run Consequences of Living in a Poor Neighborhood," The Quarterly Journal of Economics, Oxford University Press, vol. 118(4), pages 1533-1575.
    7. Maarten van Ham & David Manley, 2012. "Neighbourhood effects research at a crossroads. Ten challenges for future research," Environment and Planning A, Pion Ltd, London, vol. 44(12), pages 2787-2793, December.
    8. Ioannides, Yannis M. & Zabel, Jeffrey E., 2008. "Interactions, neighborhood selection and housing demand," Journal of Urban Economics, Elsevier, vol. 63(1), pages 229-252, January.
    9. Sanne Boschman & Maarten van Ham, 2015. "Neighbourhood selection of non-Western ethnic minorities: testing the own-group effects hypothesis using a conditional logit model," Environment and Planning A, , vol. 47(5), pages 1155-1174, May.
    10. Lina Hedman & Maarten van Ham & David Manley, 2011. "Neighbourhood choice and neighbourhood reproduction," Environment and Planning A, Pion Ltd, London, vol. 43(6), pages 1381-1399, June.
    11. Maarten van Ham & David Manley, 2010. "The effect of neighbourhood housing tenure mix on labour market outcomes: a longitudinal investigation of neighbourhood effects," Journal of Economic Geography, Oxford University Press, vol. 10(2), pages 257-282, March.
    12. Saul Hoffman & Greg Duncan, 1988. "Multinomial and conditional logit discrete-choice models in demography," Demography, Springer;Population Association of America (PAA), vol. 25(3), pages 415-427, August.
    13. John Logan & Richard Alba, 1993. "Locational returns to human capital: Minority access to suburban community resources," Demography, Springer;Population Association of America (PAA), vol. 30(2), pages 243-268, May.
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    Keywords

    neighbourhood effects; neighbourhood sorting; neighbourhood choice; income; selection bias; discrete choice; longitudinal data;

    JEL classification:

    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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