Jessie Handbury, University of Pennsylvania - Wharton
Presenter: Jessie Handbury, University of Pennsylvania - Wharton
Paper: Income Growth and the Distributional Effects of Urban Spatial Sorting
Abstract: We explore the link between rising nominal incomes at the top of the income distribution, within-city spatial sorting, and real income inequality. We develop and quantify a spatial model of a city with heterogeneous agents and non-homothetic preferences for endogenous differentiated private neighborhood amenities (e.g., restaurants and entertainment). As the rich get richer, their increased demand for such luxury amenities drives housing prices up in downtown areas, where amenity development is fueled by economies of density. The poor are made worse off, either being displaced or paying higher rents for amenities that they do not value as much. Using our model, we find that the neighborhood change within urban areas during the last two decades increased the welfare of richer households relative to that of poorer households by an additional two percentage points above and beyond the differential income growth. We conclude that welfare estimates of increased income inequality are understated if within-city spatial sorting responses are ignored.
The International Economics Seminar series is presented jointly with the Walsh School of Foreign Service and the Economics Department of Georgetown University.