Homeownership, community interactions, and segregation

We consider a multi-community city where community quality is linked to residents ’ civic efforts like being proactive in preventing crime and in ensuring the quality of publicly provided goods. Home-ownership increases incentives for such efforts, but credit market imperfections force the poor to rent. Within-community externalities can lead to segregated cities − with the rich living with rich in healthy homeowner communities, and the poor living with poor in dysfunctional renter communities. The pattern of tenure segregation across communities in the US accords well with our prediction. We study alternative tax-subsidy policies to alleviate inefficiencies in the housing market, and identify the winners and losers under such policies. Support from the MacArthur Network on Inequality and Economic Performance is gratefully acknowledged. Jyotsna Puri and Varsha Venkatesh provided valuable research assistance. We thank an anonymous referee, Roland Bénabou, Tim Besley, Avinash Dixit, Debraj Ray, and Tony Yezer for helpful comments. We have also benefited from comments by seminar participants at Boston, Brookings, Cornell, Fannie Mae, George Washington, MIT, Paris, Princeton, Toulouse, Wisconsin, and the World Bank. The views expressed in this paper are the authors ’ and should not be attributed to their employers