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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An Equilibrium Model of Sorting in an Urban Housing Market: A Study of the Causes and Consequences of Residential Segregation
January 2003
Working Paper Number:
CES-03-01
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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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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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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School Accountability and Residential Location Patterns: Evaluating the Unintended Consequences of No Child Left Behind
January 2017
Working Paper Number:
CES-17-28
The 2002 to 2015 No Child Left Behind (NCLB) Act is often considered the most significant federal intervention into education in the United States since 1965 with the passage of the Elementary and Secondary Education Act. There is growing evidence that holding schools accountable is leading to some improved educational outcomes for students. There is in contrast very little work examining whether these sweeping reforms have unintended consequences for the communities which these schools are serving. As school attendance, particularly at the elementary school level, is closely tied to one's residence, placing sanctions on a school could have negative repercussions for neighborhoods if it provides new information on school failure. In contrast, if these sanctions also bring new resources, including financial resources or school choice, they could spark additional demand within a neighborhood. Through the use of restricted access census data, which includes local housing values, rents and individual residential choices in combination with the use of a boundary discontinuity identification strategy, this paper seeks to examine how failure to meet Adequate Yearly Progress (AYP), the key enforcement mechanism of NCLB, is shaping local housing markets and residential choices in five diverse urban school districts: New York, Los Angeles, Philadelphia, Detroit and Tucson.
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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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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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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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Cheaper by the Dozen: Using Sibling Discounts at Catholic Schools to Estimate the Price Elasticity of Private School Attendance
October 2011
Working Paper Number:
CES-11-34
The effect of vouchers on sorting between private and public schools depends upon the price elasticity of demand for private schooling. Estimating this elasticity is empirically challenging because prices and quantities are jointly determined in the market for private schooling. We exploit a unique and previously undocumented source of variation in private school tuition to estimate this key parameter. A majority of Catholic elementary schools offer discounts to families that enroll more than one child in the school in a given year. Catholic school tuition costs therefore depend upon the interaction of the number and spacing of a family's children with the pricing policies of the local school. This within-neighborhood variation in tuition prices allows us to control for unobserved determinants of demand with a fine set of geographic fixed effects, while still identifying the price parameter. We use data from 3700 Catholic schools, matched to restricted Census data that identifies geography at the block level. We find that a standard deviation decrease in tuition prices increases the probability that a family will send its children to private school by one-half percentage point, which translates into an elasticity of Catholic school attendance with respect to tuition costs of -0.19. Our subgroup results suggest that a voucher program would disproportionately induce into private schools those who, along observable dimensions, are unlike those who currently attend private school.
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Interactions, Neighborhood Selection, and Housing Demand
August 2002
Working Paper Number:
CES-02-19
This paper contributes to the growing literature that identifies and measures the impact of social context on individual economic behavior. We develop a model of housing demand with neighborhood e'ects and neighborhood choice. Modelling neighborhood choice is of fundamental importance in estimating and understanding endogenous and exogenous neighborhood effects. That is, to obtain unbiased estimates of neighborhood effects, it is necessary to control for non-random sorting into neighborhoods. Estimation of the model exploits a unique data set of household data that has been augmented with contextual information at two di'erent levels ('scales') of aggregation. One is at the neighborhood cluster level, of about ten neighbors, with the data coming from a special sample of the American Housing Survey. A second level is the census tract to which these dwelling units belong. Tract-level data are available in the Summary Tape Files of the decennial Census data. We merge these two data sets by gaining access to confidential data of the U.S. Bureau of the Census. We overcome some limitations of these data by implementing some significant methodological advances in estimating discrete choice models. Our results for the neighborhood choice model indicate that individuals prefer to live near others like themselves. This can perpetuate income inequality since those with the best opportunities at economic success will cluster together. The results for the housing demand equation are similar to those in our earlier work [Ioannides and Zabel (2000] where we find evidence of significant endogenous and contextual neighborhood effects.
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Has Falling Crime Invited Gentrification?
January 2017
Working Paper Number:
CES-17-27
Over the past two decades, crime has fallen dramatically in cities in the United States. We explore whether, in the face of falling central city crime rates, households with more resources and options were more likely to move into central cities overall and more particularly into low income and/or majority minority central city neighborhoods. We use confidential, geocoded versions of the 1990 and 2000 Decennial Census and the 2010, 2011, and 2012 American Community Survey to track moves to different neighborhoods in 244 Core Based Statistical Areas (CBSAs) and their largest central cities. Our dataset includes over four million household moves across the three time periods. We focus on three household types typically considered gentrifiers: high-income, college-educated, and white households. We find that declines in city crime are associated with increases in the probability that highincome and college-educated households choose to move into central city neighborhoods, including low-income and majority minority central city neighborhoods. Moreover, we find little evidence that households with lower incomes and without college degrees are more likely to move to cities when violent crime falls. These results hold during the 1990s as well as the 2000s and for the 100 largest metropolitan areas, where crime declines were greatest. There is weaker evidence that white households are disproportionately drawn to cities as crime falls in the 100 largest metropolitan areas from 2000 to 2010.
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