Full Citation
Title: Neighborhood Dynamics and the Distribution of Opportunity
Citation Type: Working Paper
Publication Year: 2012
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Abstract: 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 childs human capital. The return on the parents investment is determined in part by the childs 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 Wilsons 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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Authors: Aliprantis, Dionissi; Carroll, Daniel
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Publication Number: 12-12
Institution: Federal Reserve Bank of Cleveland
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Publisher Location: Cleveland, Ohio
Data Collections: IPUMS NHGIS
Topics: Education, Family and Marriage, Housing and Segregation, Labor Force and Occupational Structure, Poverty and Welfare
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