NEIGHBORHOOD EFFECTSBY Steven N. Durlauf

Ania Bonarska & Okafor Luke EmekaDevelopment Workshop, 2007

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Outline• Introduction• Review of theories of neighborhood effects• Econometrics• Empirical studies• Evidence of neighborhood effects• Critiques by the Author• Critiques of the approaches in general• Can we measure neighbourhood effects and does

it matter?• Conclusions

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INTRODUCTION• Social determinants of individual behaviour

and aggregates outcomes from the angles of:– Role model effects– Peer group influence

Produce imitative behavior due to:

• Psychological factors• Interdependencies

in constraints and information transmission

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INTRODUCTION

• Poverty traps argument

• Reinforcement of changes in private incentives argument

REVIEW OF THEORIES OF NEIGHBORHOOD EFFECTS

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Review of theories of neighborhood effects

• Theoretical models answer two basic questions– Individual decision making– Memberships in a neighborhood

• Choice within neighbourhoods• Individual payoff function V(.)

(1)

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Review of theories of neighborhood effects Contd.

endogenous neighborhood effects taken as average then

Setting =0 then individual decisions will solve

(2)

(3)

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Review of theories of neighborhood effects Contd.

• Neighborhoods models and complementarity between choices

• For the payoff function described in three complementarity implies that :

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Review of theories of neighborhood effects Contd.

• Propositions1) Number of equilibria in the Brock and Durlauf

(2001a) model of binary choice with neighborhood effects

2) Limiting behavior of average choice in the Glaeser, Sacerdote and Scheinkman (1996) model

3) Average preferences in the Föllmer (1974) model of interdependent utility functions

4) Stratification in the Bénabou (1996a) model of endogenous neighborhoods

5) Neighborhood size and direct connection probabilities

ECONOMETRICS

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Econometrics

• Estimation of neighborhood effects via – Levels and changes in economic stratification

and segregation– Causal mechanisms

• Identification considering the cross

(4)

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Econometrics contd• When beliefs are rational then

• Substituting (5) into (4), the individual choices may be expressed in terms of observables via

(5)

(6)

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Econometrics contd

• Collinearity problem because of the presence of Xn(i) and Yn(i) in equ. (6)

• Reflection problem as formulated by Manski (1993)

• Nonlinear-in-means neighborhood model of the form:

(7)

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Econometrics contd

• where is invertible and . .The

self-consistent expected average choice in a neighborhood is determined by

where: (8)

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Econometrics contd

• Self-selection bias. The assumption that is unappealing• Unobservable and sibling data

- consider pair of siblings s in a given family I. Ignoring endogenous effects, individual behaviour may be described by

(9)

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Empirical studies

• Ethnography• Experiments• Econometric studies• Correlation studies• Quasi-experiments• Aggregate studies

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Evidence on neighborhood effects

• Classroom effects– Peer groups

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Evidence on neighborhood effects

• Social capital• Segregation• Social attitudes• Home ownership• Geography and social customs

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Critiques by the Author

• Deep identification problems• Neglected issues

– House market dynamics– Capital gains– Future neighborhood composition effects

• More attention on microeconomic foundations

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Critiques of approaches in general

1. Inadequate attention to physical and institutional characteristics

2. bounded rationality: limitation of knowledge and computational capacity

3. Weak conception of neighborhood eg neighborhood is not fixed and cannot be studied in isolation

4. Complex conceptualization of neighborhood could get lost

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Critiques of approaches in general

5. Selection bias eg residential sorting: housing stock and economic base

6. Inadequate account of the influence of self-identity and passion on decision making process

7. Preferences are not always primitive and stable: the influence of institutions

8. Difficult of determining boundary for neighborhood study: distance weighting rather than fixed boundary

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Critiques of approaches in general

9. Neighborhood might mean more to some people than others: low income communities and advantaged areas

10. No consensus emerged about which characteristics affected which outcomes

11. Inconsistency of findings provide no clear basis for policy formulation and implementation

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‘Neighborhood Effects’

Can we measure them and does it matter?

Ruth Lupton

London School of Economics, 2003

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What’s wrong with Neighborhood Effects research?

• Quantitative research is not complementary with qualitative research on neighborhoods

• Area-based policies should not be dependent on existence of neighborhoods effect

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Conclusions

• Well-developed theoretical literature• Econometrics literature still in nascent

stage• Large empirical literature• Suggestions for future research?

– Structural models– More collaboration between quantitative and

qualitative research

Thank you