This paper presents a new equilibrium framework for analyzing economic and policy questions related to the sorting of households within a large metropolitan area. At its heart is a model describing the residential location choices of households that makes explicit the way that individual decisions aggregate to form a housing market equilibrium. The model incorporates choice-specific unobservables, and in the presence of these, a general strategy is provided for identifying household preferences over choice characteristics, including those that depend on household sorting such as neighborhood racial composition. We estimate the model using restricted access Census data that characterize the precise residential and employment locations of a quarter of a million households in the San Francisco Bay Area, yielding accurate measures of references for a wide variety of housing and neighborhood attributes across different types of household. The main economic analysis of the paper uses these estimates in combination with the equilibrium model to explore the causes and consequences of racial segregation in the housing market. Our results indicate that, given the preference structure of households in the Bay Area, the elimination of racial differences in income and wealth would significantly increase the residential segregation of each major racial group. Given the relatively small fractions of Asian, Black, and Hispanic households in the Bay Area (each ~10%), the elimination of racial differences in income/wealth (or, education or employment geography) spreads households in these racial groups much more evenly across the income distribution, allowing more racial sorting to occur at all points in the distribution ' e.g., leading to the formation of wealthy, segregated Black and Hispanic neighborhoods. The partial equilibrium predictions of the model, which do not account for the fact that neighborhood sociodemographic compositions and prices adjust as part of moving to a new equilibrium, lead to the opposite conclusion, emphasizing the value of the general equilibrium approach developed in the paper. Our analysis also provides evidence sorting on the basis of race itself (whether driven by preferences directly or discrimination) leads to large reductions in the consumption of public safety and school quality by all Black and Hispanic households, and large reductions in the housing consumption of upper-income Black and Hispanic households.
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What Drives Racial Segregation? New Evidence Using Census Microdata
October 2002
Working Paper Number:
CES-02-26
Residential segregation on the basis of race is widespread and has important welfare consequences. This paper sheds new light on the forces that drive observed segregation patterns. Making use of restricted micro-Census data from the San Francisco Bay Area and a new measurement framework, it assesses the extent to which the correlation of race with other household characteristics, such as income, education and immigration status, can explain a significant portion of observed racial segregation. In contrast to the findings of the previous literature, which has been hampered by serious data limitations, our analysis indicates that individual household characteristics can explain a considerable fraction of segregation by race. Taken together, we find that the correlation of race with other household attributes can explain almost 95 percent of segregation for Hispanic households, over 50 percent for Asian households, and approximately 30 percent for White and Black households. Our analysis also indicates that different factors drive the segregation of different races. Language explains a substantial proportion - more than 30 percent - of Asian and Hispanic segregation, education explains a further 20 percent of Hispanic segregation, while income is the most important non-race household characteristic for Black households, explaining around 10 percent of Black segregation.
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A Unified Framework for Measuring Preferences for Schools and Neighborhoods
October 2007
Working Paper Number:
CES-07-27
This paper develops a comprehensive framework for estimating household preferences for school and neighborhood attributes in the presence of sorting. It embeds a boundary discontinuity design in a heterogeneous model of residential choice to address the endogeneity of school and neighborhood attributes. The model is estimated using restricted-access Census data from a large metropolitan area, yielding a number of new results. First, households are willing to pay less than one percent more in house prices ' substantially lower than previous estimates ' when the average performance of the local school increases by five percent. Second, much of the apparent willingness to pay for more educated and wealthier neighbors is explained by the correlation of these sociodemographic measures with unobserved neighborhood quality. Third, neighborhood race is not capitalized directly into housing prices; instead, the negative correlation of neighborhood race and housing prices is due entirely to the fact that blacks live in unobservably lower quality neighborhoods. Finally, there is considerable heterogeneity in preferences for schools and neighbors: in particular, we find that households prefer to selfsegregate on the basis of both race and education.
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Place of Work and Place of Residence: Informal Hiring Networks and Labor Market Outcomes
October 2005
Working Paper Number:
CES-05-23
We use a novel dataset and research design to empirically detect the effect of social interactions among neighbors on labor market outcomes. Specifically, using Census data that characterize residential and employment locations down to the city block, we examine whether individuals residing in the same block are more likely to work together than those in nearby blocks. We find evidence of significant social interactions operating at the block level: residing on the same versus nearby blocks increases the probability of working together by over 33 percent. The results also indicate that this referral effect is stronger when individuals are similar in sociodemographic characteristics (e.g., both have children of similar ages) and when at least one individual is well attached to the labor market. These findings are robust across various specifications intended to address concerns related to sorting and reverse causation. Further, having determined the characteristics of a pair of individuals that lead to an especially strong referral effect, we provide evidence that the increased availability of neighborhood referrals has a significant impact on a wide range of labor market outcomes including employment and wages.
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You Can Take it With You: Proposition 13 Tax Benefits, Residential Mobility, and Willingness to Pay for Housing Amenities
June 2008
Working Paper Number:
CES-08-15
The endogeneity of prices has long been recognized as the main identification problem in the estimation of marginal willingness to pay (MWTP) for the characteristics of a given product. This issue is particularly important when estimating MWTP in the housing market, since a number of housing and neighborhood features are unobserved by the econometrician. This paper proposes the use of a well defined type of transaction costs ' moving costs generated by property tax laws - to deal with this type of omitted variable bias. California's Proposition 13 property tax law is the source of variation in transaction costs used in the empirical analysis. Beyond its fiscal consequences, Proposition 13 created a lock-in effect on housing choice because of the implicit tax break enjoyed by homeowners living in the same house for a long time. First, I provide estimates of this lock-in effect using a natural experiment created by two subsequent amendments to Proposition 13 - Propositions 60 and 90. These amendments allow households headed by an individual over the age of 55 to transfer the implicit tax benefit to a new home. I show that mobility rates of 55-year old homeowners are approximately 25% higher than those of 54 year olds. Second, all these features of the tax law are then incorporated into a household sorting model. The key insight of this model is that because of the property tax law, different potential buyers have different user costs for the same house. The exogenous property tax component of this user cost then works as an instrument for prices. I find that MWTP estimates for housing characteristics are approximately 100% upward biased when the model does not account for the price endogeneity.
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Identifying Individual and Group Effects in the Presence of Sorting: A Neighborhood Effects Application
January 2007
Working Paper Number:
CES-07-03
Researchers have long recognized that the non-random sorting of individuals into groups generates correlation between individual and group attributes that is likely to bias naive estimates of both individual and group effects. This paper proposes a non-parametric strategy for identifying these effects in a model that allows for both individual and group unobservables, applying this strategy to the estimation of neighborhood effects on labor market outcomes. The first part of this strategy is guided by a robust feature of the equilibrium in the canonical vertical sorting model of Epple and Platt (1998), that there is a monotonic relationship between neighborhood housing prices and neighborhood quality. This implies that under certain conditions a non-parametric function of neighborhood housing prices serves as a suitable control function for the neighborhood unobservable in the labor market outcome regression. This control function converts the problem to a model with one unobservable so that traditional instrumental variables solutions may be applied. In our application, we instrument for each individual.s observed neighborhood attributes with the average neighborhood attributes of a set of observationally identical individuals. The neighborhood effects model is estimated using confidential microdata from the 1990 Decennial Census for the Boston MSA. The results imply that the direct effects of geographic proximity to jobs, neighborhood poverty rates, and average neighborhood education are substantially larger than the conditional correlations identified using OLS, although the net effect of neighborhood quality on labor market outcomes remains small. These findings are robust across a wide variety of specifications and robustness checks.
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Structural versus Ethnic Dimensions of Housing Segregation
March 2016
Working Paper Number:
CES-16-22
Racial residential segregation is still very high in many American cities. Some portion of segregation is attributable to socioeconomic differences across racial lines; some portion is caused by purely racial factors, such as preferences about the racial composition of one's neighborhood or discrimination in the housing market. Social scientists have had great difficulty disaggregating segregation into a portion that can be explained by interracial differences in socioeconomic characteristics (what we call structural factors) versus a portion attributable to racial and ethnic factors. What would such a measure look like? In this paper, we draw on a new source of data to develop an innovative structural segregation measure that shows the amount of segregation that would remain if we could assign households to housing units based only on non-racial socioeconomic characteristics. This inquiry provides vital building blocks for the broader enterprise of understanding and remedying housing segregation.
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Who Moves to Mixed-Income Neighborhoods?
August 2010
Working Paper Number:
CES-10-18
This paper uses confidential Census data, specifically the 1990 and 2000 Census Long Form data, to study the income dispersion of recent cohorts of migrants to mixed-income neighborhoods. If recent in-migrants to mixed-income neighborhoods exhibit high levels of income heterogeneity, this is consistent with stable mixed-income neighborhoods. If, however, mixed-income neighborhoods are comprised of older homogeneous lower-income (higher income) cohorts combined with newer homogeneous higher-income (lower-income) cohorts, this is consistent with neighborhood transition. Our results indicate that neighborhoods with high levels of income dispersion do in fact attract a much more heterogeneous set of in-migrants, particularly from the tails of the income distribution, but that income heterogeneity does tend to erode over time. Our results also suggest that the residents of mixed-income neighborhoods may be less heterogeneous with respect to lifetime income.
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Where to Build Affordable Housing?
Evaluating the Tradeoffs of Location
December 2023
Working Paper Number:
CES-23-62R
How does the location of affordable housing affect tenant welfare, the distribution of assistance, and broader societal objectives such as racial integration? Using administrative data on tenants of units funded by the Low-Income Housing Tax Credit (LIHTC), we first show that characteristics such as race and proxies for need vary widely across neighborhoods. Despite fixed eligibility requirements, LIHTC developments in more opportunity-rich neighborhoods house tenants who are higher income, more educated, and far less likely to be Black. To quantify the welfare implications, we build a residential choice model in which households choose from both market-rate and affordable housing options, where the latter must be rationed. While building affordable housing in higher-opportunity neighborhoods costs more, it also increases household welfare and reduces city-wide segregation. The gains in household welfare, however, accrue to more moderate-need, non-Black/Hispanic households at the expense of other households. This change in the distribution of assistance is primarily due to a 'crowding out' effect: households that only apply for assistance in higher-opportunity neighborhoods crowd out those willing to apply regardless of location. Finally, other policy levers'such as lowering the income limits used for means-testing'have only limited effects relative to the choice of location.
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Is the Melting Pot Still Hot? Explaining the Resurgence of Immigrant Segregation
August 2004
Working Paper Number:
CES-04-10
This paper uses decennial Census data to examine trends in immigrant segregation in the United States between 1910 and 2000. Immigrant segregation declined in the first half of the century, but has been rising steadily over the past three decades. Analysis of restricted access 1990 Census microdata suggests that this rise would be even more striking if the native-born children of immigrants could be consistently excluded from the analysis. We analyze panel and cross-sectional variation in immigrant segregation, as well as housing price patterns across metropolitan areas, to test four hypotheses of immigrant segregation. Immigration itself has surged in recent decades, but the tendency for newly arrived immigrants to be younger and of lower socioeconomic status explains very little of the recent rise in immigrant segregation. We also find no evidence of increased nativism in the housing market. Evidence instead points to changes in urban form, particularly the tendency for ethnic enclaves to form as suburbanizing households leave older neighborhoods, as a central explanation for the new immigrant segregation.
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Small Homes, Public Schools, and Property Tax Capitalization
March 2013
Working Paper Number:
CES-13-04
Efforts to estimate the degree to which local property taxes are capitalized into house values are complicated by any spurious correlation between property taxes and unobserved public services. One public service of particular interest is the provision of local public schools. Not only do public schools bulk large in the local property tax bill, but the inherent difficulty in measuring school quality has potentially undermined earlier attempts at achieving unbiased estimates of property tax capitalization. This particular problem has been of special concern since Oates' (1969) seminal paper. We sidestep the problem of omitted or misspecified measures of school quality by focusing on a segment of the housing market that likely places little-to-no value on school quality: small homes. Because few households residing in small homes have public school children, we anticipate that variations in their value does not account for differentials in public school quality. Using restricted-access microdata provided by the U.S. Census, and a quasi- experimental identification strategy, we estimate that local property taxes are nearly fully capitalized into the prices of small homes.
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