The aim of this paper is to show that both location and stereotypical racial beliefs matter for explaining the high criminality rate among blacks in cities. In our model, blacks and whites are identical in all respects. However, if, for not economic but extrinsic reasons, everybody (including blacks) believes that more blacks become criminals than whites, then we show that more blacks (for rational reasons) become criminals than whites, earn lower wages and reside in ghettos located far away from legal activities. There is a vicious circle in which blacks cannot escape because both location and labour market outcomes reinforce each other to imply high crime rates among blacks living in cities. This is referred to as the discriminating equilibrium. If there are no such beliefs in the economy, then another equilibrium emerges in which blacks and whites experience the same labour market and crime outcomes and live together. This is referred to as the non-discriminating equilibrium. The key feature of this belief-based model is that multiple equilibria are sustainable only because of space. Indeed, since location is endogeneous, workers who are believed to be criminals have less incentives to locate close to jobs. Since workers that are located further away from jobs have a lower net wage, their risk of capture is lower and hence the incidence of crime is greater. Consequently, if there were no spatial dimension in this economy so that all workers were residing in the same location, multiple equilibria would not emerge and the only sustainable equilibrium would be the non-discriminating one, even if all agents believe that more blacks are criminals than whites. In other words, beliefs alone cannot generate the discriminating equilibrium; it is the presence of both 'negative' beliefs and 'bad' locations that allow the discriminating equilibrium to exist. It is thus our contention that location and beliefs play a major role in explaining the high criminality rate among blacks.
