Pollution and Persistent Neighborhood Sorting

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n?u=RePEc:cep:sercdp:0208&r=his

persistence between 1971 and 2011 and relies on a quantitative, dynamic version of

the model developed in Section 2. Finally, Section 8 briefly concludes.

2 Pollution and neighborhood sorting

In this section, we introduce a stylized framework to study the effect of pollution

on neighborhood sorting. This static model is the foundation for a quantitative,

dynamic version that we further develop in Section 7.

In the model, neighborhood sorting arises out of within-city differences in consumptive

amenities. 6 Neighborhoods are made up of an interval of locations, and

the amenity level at a location is part air quality (constant within a neighborhood)

and part location-specific. As in Lee and Lin (2013), there is a complementarity

between consumption and amenities. Willingness to pay rent in high amenity locations

is relatively higher for the high income types: in equilibrium, all high income

workers are housed in the best amenity locations, all low income workers are in the

other locations, and a difference in air quality causes sorting of a portion of the high-

(low-)skilled workers into the less (more) polluted neighborhood.

Environment A city is composed of two neighborhoods indexed j ∈ {W, E} (West

and East). The mass of land in each neighborhood is µ(Ω(j)) = 1, and we assume

that rent is collected by absentee landlords who lease land to the worker who will pay

the most rent. The mass of workers is of measure 2. Workers are heterogeneous in

their income, θ, and they are perfectly mobile. A fixed proportion γ are low-skilled

workers with income θ l ; the remaining workers are high-skilled and have income

θ h > θ l .

While the quantitative model in Section 7 will be dynamic, we assume here a

static framework. Workers choose their location to maximize,

V (j, l) = A(j, l)c(j, l) subject to c(j, l) + R(j, l) = θ, (1)

where A(j, l) is the amenity level in location l of neighborhood j, c(j, l) is consumption

and R(j, l) is rent. Since consumption and amenities are complementary,

high-skilled workers will sort into the most attractive neighborhood locations.

The amenity at each location l in each neighborhood j is made up of three

components: a location amenity x, air quality a (at the neighborhood level), and an

6 By contrast, Redding and Sturm (2016) model the production side and estimate spillovers

between neighborhoods.

7

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