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Working Paper

Neighborhood Dynamics and the Distribution of Opportunity

Wilson (1987) argued that policies ending racial discrimination would not equalize opportunity without addressing residential sorting and neighborhood externalities. This paper studies related counterfactual policies using an overlapping-generations dynamic general equilibrium model of residential sorting and intergenerational human capital accumulation. In the model, households choose where to live and how much to invest toward the production of their child's human capital. The return on parents' investment is determined in part by the child's ability and in part by an externality determined by the human capital in their neighborhood. We calibrate the model with two neighborhoods and neighborhood-specific production technologies to data from Chicago when mobility was restricted by race. We then conduct three numerical experiments by eliminating the restriction on neighborhood choice, equalizing production technologies, or both. We find that allowing residential mobility generates persistent income inequality, even when technologies are equalized across neighborhoods. Equalizing technologies only equalizes opportunity for residents in the originally segregated neighborhood when high-income households reside there. Our findings suggest that policies aimed at improving outcomes in impoverished areas should feature incentives for high-income households to stay or migrate into the neighborhood.

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.


Suggested Citation

Aliprantis, Dionissi, and Daniel R. Carroll. 2015. “Neighborhood Dynamics and the Distribution of Opportunity.” Federal Reserve Bank of Cleveland, Working Paper No. 15-25. https://doi.org/10.26509/frbc-wp-201525