Segregation and the Spatial Externalities of Inequality: A Theory of Interdependence and Public Goods in Cities

Abstract

Conventional wisdom claims that racial diversity undermines public goods provision. I show that class differences, instead, can generate a form of collateral cooperation for public goods. I argue that segregation along class lines determines patterns in spatial externalities of inequality (e.g., crime, sewage pollution, sewage-based diseases) that spill over from impoverished areas to the middle-class. In integrated (de-segregated) cities, the scale of such externalities undermines the relative efficacy of small-scale private services (e.g., private guards, private water wells), thereby, inducing middle-class preferences for public goods that address externalities. Thus, while segregation polarizes preferences, integration --through the externalities mechanism-- enables preference convergence on the public provision of services in place of private options. I illustrate the theory using evidence from focus groups and ethnographic observations. To test the theory on a larger scale, I propose an instrument for segregation that interacts rural-to-urban predicted migration (i.e., shift-share instrument) of the poor with the destination locality's "urban form.'' I combine this quasi-experimental strategy with neighborhood-level measures of class- and race-based segregation and an original face-to-face survey of preferences with over 4,000 households across 420 of the total 456 neighborhoods in the megacity of São Paulo, Brazil. The analysis introduces self-interest in reducing intergroup externalities as a new mechanism that drives cooperation for public goods even in racially diverse societies. Using embedded mechanism vignettes, I distinguish the mechanism from the conventional affective mechanisms –e.g., racial tolerance, social affinity– of intergroup contact.