Income Inequality, School Choice and the Endogenous Gentrification of US Cities

Why in some urban areas do rich and poor households cohabit at the community level while, in others, we observe a sorting by income? To answer this question I develop a two-community general equilibrium framework of school quality, residential choice and tax decision. The model predicts that in highly unequal societies low and high income households choose to live in the same community but segregate by schooling. When inequality is smaller, we observe the typical sorting by income across communities. The effect of inequality on the quality of public schools depends on the relative size of the housing market of each community. When inequality increases, if the housing conditions of the community in which rich and poor households cohabit are affordable, then an inflow of high income middle class households towards this community emerges (gentrification). As a consequence, inequality impacts negatively the quality of the public school because both rich and poor households vote for lower taxation.