Estimating Neighborhood Effects: Evidence from War-time Destruction in London

We use Second World War destruction in London as a natural experiment to provide evidence on neighborhood effects. We use a newly-collected and remarkable dataset on thousands of locations within London that records wartime destruction and the economic and social characteristics of locations from the late nineteenth to late-twentieth centuries. We combine these data with a quantitative model of the sorting of heterogeneous groups of agents across locations that differ in productivity, amenities and transport infrastructure. We find that both own and neighbors' destruction affect patterns of spatial sorting and that the effects of neighbors' destruction are highly localized (0-200 meters). These findings provide evidence for spatial sorting as a mechanism through which neighborhood effects occur.