Residential Segregation: The Role of Inequality and Housing Subsidies

Abstract

Residential segregation is a key public policy issue that is driven by economic factors on the one side, and individual attitudes towards ethnic diversity on the other side. We assume a modeling framework that consists of a population of two ethnic groups, a rental market for each neighborhood, and household's utility which depends on consumption and housing. Accounting for income disparities and heterogeneous preferences for living in ethnically diverse neighborhoods, we examine the residential segregation patterns that occur when households make their neighborhood choice by taking economic and diversity related aspects to account. The investigation reveals that ethnic income disparities and heterogeneous preferences are antagonistic forces such that a certain level of income stratification is the price for residential integration. In the light of these findings, we discuss to which extent and under which conditions housing subsidy policies can favor residential integration.

Keywords: Residential segregation; ethnic income disparities; housing subsidies; evolutionary dynamics

JEL Classification: C73, C63, R23, J15, I30