Neighborhood feedbacks, endogenous stratification, and income inequality

This paper explores the evolution of the cross-section income distribution in economies where endogenous neighborhood formation interacts with positive within-neighborhood feedback effects. We study an economy in which the economic success of adults is determined by the characteristics of the families in the neighborhood in which a person grows up. These feedbacks take two forms. First, the tax base of a neighborhood affects the leveI of education investment in offspring. Second, the effectiveness of education investment is affected by a neighborhood's in come distribution, reflecting factors such as role model or labor market connection effects. Conditions are developed under which endogenous stratification, defined as the tendency for families wi th similar incomes to choose to form common communities, will occur. When families are allowed to choose their neighborhoods, wealthy families will have an incentive to segregate themselves from the rest of the population. This resulting stratification is supported by house price differences between ricli and poor communities. Endogenous stratification can lead to pronounced intertemporal inequality as different families provide very different interaction environments for offspring. When the transformation of human capital into in come exhibits constant retums to scale, cross-section in come differences may also grow across time. As a result, endogenous stratification and neighborhood feedbacks can interact to produce long run inequality.

Fertility and the value of Life

The value of life methodology has been recently applied to a wide range of contexts as a means to evaluate welfare gains attributable to mortality reductions and health improvements. Yet, it suffers from an important methodological drawback: it does not incorporate into the analysis child mortality, individuals’ decisions regarding fertility, and their altruism towards offspring. Two interrelated dimensions of fertility choice are potentially essential in evaluating life expectancy and health related gains. First, child mortality rates can be very important in determining welfare in a context where individuals choose the number of children they have. Second, if altruism motivates fertility, life expectancy gains at any point in life have a twofold effect: they directly increase utility via increased survival probabilities, and they increase utility via increased welfare of the offspring. We develop a manageable way to deal with value of life valuations when fertility choices are endogenous and individuals are altruistic towards their offspring. We use the methodology developed in the paper to value the reductions in mortality rates experienced by the US between 1965 and 1995. The calculations show that, with a very conservative set of parameters, altruism and fertility can easily double the value of mortality reductions for a young adult, when compared to results obtained using the traditional value of life methodology.