Spillovers, stratification, and inequality

This paper surveys some recent work which seeks to model persistent income inequality and explain such phenomena as ghetto formation and poverty traps. The paper illustrates how a number of these models possess a common structure in which local spillover effects interact with income-based stratification of neighborhoods to transmit parental economic status from generation to generation. As such, these models represent an extension of the macroeconomic literature on spillovers and coordination failures to economic environments which endogenize the interaction environments of individual agents. The theoretical and empirical justifications of these spillover and stratification effects are discussed. Finally, some empirical implications of these models are analyzed.