Hosted by Professor: Sharon Traiberman- email@example.com
This paper studies a new economic force underlying the spatial sorting of rich and poorhouseholds in cities. On the demand side, households with different incomes choose neighborhoods and differ in their expenditures across various local services. On the supply side, service establishments sort into neighborhoods while taking into account proximity to their consumers. This two-sided sorting leads to endogenous differences in the local price indexthat amplify the concentration of household groups. A recent literature in urban economics has rationalized spatial sorting of households that is left unexplained by local incomes or housing costs by modeling pure amenity spillovers. In this paper, I quantify the contribution of endogenous price indices to spatial sorting that is usually projected onto such reduced-form spillovers, and study the implications of two-sided sorting for urban policy. To do so, I develop a quantitative equilibrium model of the city that features two-sided sorting and nests many urban models. I estimate the key parameters of the model using detailed micro data for Los Angeles from 1990-2014. I find that spatial variation in local price indices decreases the estimates of reduced-form spillovers by about 30-50 percent. To shed light on the policy implications, I simulate policy counterfactuals, and compare the effects to the existing framework with only reduced-form amenity spillovers. By studying a number of prominent place-based policies in Los Angeles, I find substantially different effects on neighborhood composition and welfare between both models.