From Neighborhoods to Nations: The Economics of Social Interactions

By Yannis M. Ioannides | Go to book overview

CHAPTER 3
Location Decisions of Individuals and Social
Interactions

3.1 INTRODUCTION

When my neighbors add to their house by remodeling it, or simply keep up its maintenance in ways that shame me, they give me an incentive to keep up, too. My children’s hearing about academic, sports, and other accomplishments of other children in the neighborhood motivates them to imitate them or even to react in a nonconformist way. These types of effects are known as endogenous social effects because they originate in deliberate decisions by other members of one’s reference groups.

Individuals may value the actual characteristics of others in their social and residential milieus and deliberately seek particular configurations of such characteristics. Effects that emanate in this fashion from the characteristics of members of one’s reference groups are known as exogenous or contextual effects and are also social effects. When different individuals tend to act similarly because they have similar characteristics (or face similar institutional environments), we say that they are subject to correlated effects. When the coexistence of these effects cannot be excluded on theoretical grounds, challenging problems may be posed for those wishing to distinguish among them. As I discuss in chapter 2, there are good reasons for wanting to know their respective magnitudes.

For example, how can policy affect social outcomes at the urban neighborhood or community level? How can it affect educational outcomes in schools? Specifically, in the context of the urban economy, could we engineer improvements in living conditions for the residents of “depressed” or disadvantaged areas by encouraging the relocation of individuals with particular characteristics? Two actual policy options are worth contemplating in this context and operate on the supply and the demand, respectively. Increasing the supply of affordable housing within otherwise high-housing cost communities is one such policy option. Residents who value proximity to demographically more diverse groups would be better off, but others might be worse off. The net effect depends on neighborhood effects. Another policy is subsidizing the relocation of low-income households out of disadvantaged and into more

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