The End of the American Dream? Inequality and Segregation in US cities (with Veronica Guerrieri)

Abstract:

This paper explores the dynamic relationship between income inequality, segregation and mobility. Using data from the 100 largest US metropolitan areas, we document a large increase in inequality and segregation over the last four decades and a strong relationship between them both in the time series and in the cross section. We develop a general equilibrium overlapping generation model in which income inequality and segregation are both endogenous and feed on each other. Agents make residential choices and invest in their children's education. Neighborhoods differ in the education composition of their residents which, in turn, affects the return from investing in education. High inequality, through housing prices, drives up the residential sorting of families in neighborhoods. As society becomes more segregated, the return from investing in children's education endogenously diverge between low and high income families. A larger differential in the return from education translates into a larger gap in children's educational outcomes, lower intergenerational mobility and higher inequality in the following generation. Using data on children's test scores from US school districts, we show that the relationship between children's educational outcomes and parental income is significantly stronger in highly segregated metropolitan areas.