NEIGHBORHOOD EFFECTS BY Steven N. Durlauf Ania Bonarska & Okafor Luke Emeka Development Workshop, 2007

3/12/2007 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

3/12/2007 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

3/12/2007 INTRODUCTION Poverty traps argument Reinforcement of changes in private incentives argument

REVIEW OF THEORIES OF NEIGHBORHOOD EFFECTS

3/12/2007 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)

3/12/2007 Review of theories of neighborhood effects Contd. endogenous neighborhood effects taken as average then Setting =0 then individual decisions will solve (2) (3)

3/12/2007 Review of theories of neighborhood effects Contd. Neighborhoods models and complementarity between choices For the payoff function described in three complementarity implies that :

3/12/2007 Review of theories of neighborhood effects Contd. Propositions 1)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

3/12/2007 Econometrics Estimation of neighborhood effects via –Levels and changes in economic stratification and segregation –Causal mechanisms Identification considering the cross (4)

3/12/2007 Econometrics contd When beliefs are rational then Substituting (5) into (4), the individual choices may be expressed in terms of observables via (5) (6)

3/12/2007 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)

3/12/2007 Econometrics contd where is invertible and..The self-consistent expected average choice in a neighborhood is determined by where: (8)

3/12/2007 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)

3/12/2007 Empirical studies Ethnography Experiments Econometric studies Correlation studies Quasi-experiments Aggregate studies

3/12/2007 Evidence on neighborhood effects Classroom effects –Peer groups

3/12/2007 Evidence on neighborhood effects Social capital Segregation Social attitudes Home ownership Geography and social customs

3/12/2007 Critiques by the Author Deep identification problems Neglected issues –House market dynamics –Capital gains –Future neighborhood composition effects More attention on microeconomic foundations

3/12/2007 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

3/12/2007 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

3/12/2007 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

3/12/2007 ‘Neighborhood Effects’ Can we measure them and does it matter? Ruth Lupton London School of Economics, 2003

3/12/2007 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

3/12/2007 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