Investigating The American Dream: The Role Of Neighborhoods | Hoover Institution

Quick Overview

The research agenda investigates the macroeconomic implications of neighborhood exposure effects, finding that rising income inequality and residential segregation in the US over the last 40 years correlate strongly with lower intergenerational mobility, specifically showing higher persistence of poverty in highly segregated metropolitan areas.

Key Points: Income inequality in the US, measured by the Gini coefficient, has increased concurrently with residential segregation by income, measured by the dissimilarity index, over the last 40 years. Children raised in higher opportunity neighborhoods systematically achieve better outcomes as adults in terms of educational attainment and adult income, demonstrating causal neighborhood exposure effects. Metropolitan areas with higher income segregation in 1980 also exhibited higher income inequality at that time, and cities with the largest increase in segregation from 1980 to 2010 saw the largest increase in inequality. The NLSY data shows that in MSAs with high income segregation, the probability of a child from the bottom income quartile remaining in the bottom quartile (persistence of poverty) is higher compared to less segregated MSAs. The static model posits that parents choose neighborhood A (high spillover) based on a threshold rule: high wage and high child latent productivity (A), because high demand drives up rent (RA), pricing out lower-income families. A utilitarian planner deviates from the market equilibrium by placing all high productivity children in the high spillover neighborhood (A) regardless of parental wage, illustrating a misallocation due to the market failure of the borrowing constraint. The researchers estimate that neighborhood spillovers in children's development account for about one-third of the rise in residential segregation by income observed in the data.

Context: Marta Praa presented research being prepared for a handbook on intergenerational mobility, focusing on the macroeconomic implications of neighborhood exposure effects on children's outcomes. The starting point for the research agenda is the simultaneous rise in income inequality and residential segregation by income in the United States over the past four decades, alongside empirical evidence showing that neighborhood quality causally shapes children's future educational attainment and income.