Working Paper: NBER ID: w10871
Authors: Patrick Bayer; Fernando Ferreira; Robert McMillan
Abstract: In many theoretical public finance models, school quality plays a central role as a determinant of household location choices and in turn, of neighborhood stratification. In contrast, the recent empirical literature has almost universally concluded that the direct effect of school quality on housing demand is weak, a conclusion that is robust across a variety of research designs. Using an equilibrium model of residential sorting, this paper closes the gap between these literatures, providing clear evidence that the full effect of school quality on residential sorting is significantly larger than the direct effect -- four times as great for education stratification, twice for income stratification. This is due to a strong social multiplier associated with heterogeneous preferences for peers and neighbors; initial changes in school quality set in motion a process of re-sorting on the basis of neighborhood characteristics that reinforces itself, giving rise to substantially larger stratification effects.
Keywords: School Quality; Residential Sorting; Neighborhood Stratification; Social Multipliers
JEL Codes: I20; H41; R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| School quality (I21) | Residential sorting (R23) |
| School quality (I21) | Housing demand (R21) |
| Elimination of school quality as a determinant of household locations (R20) | Stratification decline (P27) |
| Initial changes in school quality (I21) | Sorting among households based on neighborhood characteristics (R20) |