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Title: Price and Prejudice: The Interaction between Preferences and Incentives in the Dynamics of Racial Segregation

Citation Type: Miscellaneous

Publication Year: 2008

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Abstract: In the classic Schelling tipping model, white residents flee a neighborhood when the minorityresident share exceeds a personal tolerance threshold. Thus, a small movement in minorityshare beyond a tipping point can cause an integrated neighborhood to segregate rapidly. A keylimitation of the Schelling model is that it does not consider the role of expectations and pricesin the tipping process. This paper explores an augmented tipping model in which white and minorityrenters and homeowners interact both spatially (sharing a neighborhood) and financiallythrough rents and house prices. I show that the market mechanism can exacerbate the tippingprocess: homeowners face a pecuniary incentive to sell their houses prior to neighborhood tippingto avoid a loss in house value, whereas renters are less exposed to tipping because theybear no such asset risk. Hence, high rates of homeownership among white residents make neighborhoodsmore likely to tip. Building on recent work by Card, Mas, and Rothstein, this studyevaluates this prediction by analyzing the interaction between initial homeownership rates andneighborhood tipping between 1970 and 2000 across a large sample of Metropolitan StatisticalAreas (MSAs). The results show that when neighborhoods tip, those with high ownership ratesexperience substantially larger white population loss and a larger decline in house prices. Inaddition, homeowners are disproportionately likely to exit a neighborhood when tipping occurs,and income and education levels fall, in particular among whites. These findings provide initialevidence that tipping, usually considered a nonmarket interaction, is augmented by marketforces.

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Authors: Dorn, David

Publisher: Boston University

Data Collections: IPUMS USA

Topics: Housing and Segregation, Race and Ethnicity

Countries: United States