Wednesday, March 15, 2006

How much do neighborhoods matter?

Recently, we've discussed why people want to live in "good neighborhoods," and, in one section, we discussed some of the tradeoffs associated with segregation of "high" and "low" types. These issues have significant policy implications for both individuals and government. How much your neighbors affect the choices and outcomes of your family plays a role in your willingness to pay for certain property. As a society, we embrace access to opportunity. However, our initial attempts to provide the needy with shelter (massive housing projects) created dense concentrations of poverty and crime and led many to question how much housing policies were actually limiting the opportunities of poor families by depriving them of sufficient role models, etc.

Really, though, how much do neighborhoods affect individual outcomes? Intuitively, it makes sense that neighbors matter, but what do the data show.

Empirically estimating the effect of neighbors on outcomes is difficult because we choose our neighbors. It is difficult to separate the effects of the neighborhood on the outcome of interest from the effects of other things which affect both the outcome and the decision to live in a neighborhood. That is, there is always a certain amount of omitted variable bias.

During the empirical overview, we discussed how solving such problems typically requires some sort of randomization. Fortunately, the government let some economists (including my current "boss" Larry Katz) introduce an element of randomization into neighborhood choice with the Moving to Opportunity experiment -- which gave a randomly selected group of families access to a new form of housing assistance that required they move to a low poverty area.

We will discuss the specifics of the MTO experiment in class tomorrow, but you can access the bulk of the research that has been conducted here (you can click the links and read the papers or at least the introductions or scroll down to the abstracts to get a rough picture of what they found).

On the subject of neighborhoods (as opposed to neighbors) and in the vein of shameless self promotion, as mentioned previously, for part of my dissertation, I exploited Harvard's housing lottery to estimate the effect of a certain aspect of neighborhoods (distance) on individual choices and neighborhood quality. You can check out my paper, "Distance and Social Capital: Can Isolation be Good?", here and the Crimson summary of it here.

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