Working Paper: NBER ID: w26143
Authors: Alessandra Fogli; Veronica Guerrieri
Abstract: Since the '80s the US has experienced not only a steady increase in income inequality, but also a contemporaneous increase in residential segregation by income. Using US Census data, we first document a positive correlation between inequality and segregation at the MSA level between 1980 and 2010. We then develop a general equilibrium overlapping generations model where parents choose the neighborhood where to raise their children and invest in their children's education. In the model, segregation and inequality amplify each other because of a local spillover that affects the returns to education. We calibrate the model using 1980 US data and the micro estimates of the effect of neighborhood exposure in Chetty and Hendren (2018). We then assume that in 1980 an unexpected permanent skill premium shock hits the economy and show that segregation contributes to 28% of the subsequent increase in inequality.
Keywords: inequality; segregation; residential choice; education; spillovers
JEL Codes: D5; D63; E24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Residential segregation (R23) | Income inequality (D31) |
| Skill premium shock (J24) | Residential segregation (R23) |
| Skill premium shock (J24) | Income inequality (D31) |
| Income inequality (D31) | Residential segregation (R23) |