Neighborhood Dynamics and the Distribution of Opportunity

38 Pages Posted: 23 Oct 2015

See all articles by Dionissi Aliprantis

Dionissi Aliprantis

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Daniel Carroll

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Date Written: 2015-10-22

Abstract

Wilson (1987) argued that policies ending racial discrimination would not equalize opportunity without addressing residential sorting and neighborhood externalities. This paper studies related counterfactual policies using an overlapping-generations dynamic general equilibrium model of residential sorting and intergenerational human capital accumulation. In the model, households choose where to live and how much to invest toward the production of their child's human capital. The return on parents' investment is determined in part by the child's ability and in part by an externality determined by the human capital in their neighborhood. We calibrate the model with two neighborhoods and neighborhood-specific production technologies to data from Chicago when mobility was restricted by race. We then conduct three numerical experiments by eliminating the restriction on neighborhood choice, equalizing production technologies, or both. We find that allowing residential mobility generates persistent income inequality, even when technologies are equalized across neighborhoods. Equalizing technologies only equalizes opportunity for residents in the originally segregated neighborhood when high-income households reside there. Our findings suggest that policies aimed at improving outcomes in impoverished areas should feature incentives for high-income households to stay or migrate into the neighborhood.

Keywords: Neighborhood externality, Segregation, Human Capital

JEL Classification: D31, D58, E24, J24, R23

Suggested Citation

Aliprantis, Dionissi and Carroll, Daniel, Neighborhood Dynamics and the Distribution of Opportunity (2015-10-22). FRB of Cleveland Working Paper No. 1525, Available at SSRN: https://ssrn.com/abstract=2678564

Dionissi Aliprantis (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Daniel Carroll

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

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