Segregation and Racial Preferences : An Analysis of Choice Based on Satisfaction and Outcome Measures

This paper investigates the notion that preferences for neighborhood racial composition may be modeled as derived demands than arise from the preferences that households have for social interaction where factors such as prejudice or cultural affinity affect the quality of across group social interactions. The paper sets up a simple consumer utility maximization problems and uses the dual of this problem to investigate the bidding and sorting of households over racial composition. The models suggests that we cannot rule out the possibility that African-American households outbid white households to reside in white neighborhoods even with a very strong set of assumptions. The paper then specifies an econometric model of residential location choice in which the unobservable attributes that actually enter household preferences are replaced with instruments based on measures of household outcomes and satisfaction. The model is estimated using the 1985 metropolitan sample of the American Housing Survey for Philadelphia. The paper finds evidence that racial differences in preferences for education can explain a substantial portion, but not all, of the racial segregation observed in 1985 Philadelphia