Neighborhood Eeects Can Increase Inequality and Hurt Those at the Bottom

This paper investigates the general equilibrium consequences of assuming that the time it takes an individual to obtain a skill depends on the average level of education in the neighborhood of his/her birth. These neighborhood e ects provide an incentive for the high educated to break-o and form an exclusive neighborhood. Economic segregation is implemented by a zoning requirement which speci es that members of the better neighborhood must purchase an exogenously given amount of housing services. The investigation reveals that individuals born into better neighborhood prefer economic segregation while those born into the less well-o neighborhood prefer the case of one neighborhood. The analysis also shows that various measures of economic inequality increase with the change from one to two neighborhoods, and increase with the exclusivity of the zoning restriction. The behavior of the agents in this model is similar to a central hypothesis of The Truly Disadvantaged [19].