Scaling Up the American dream: A Dynamic Analysis

Title: Scaling Up the American dream: A Dynamic Analysis (joint with Veronica Guerrieri, Mark Ponder, and Marta Prato.)

Abstract: The Moving to Opportunity (MTO) program implemented in the ’90s offered vouchers to low income people living in high poverty neighborhoods to move to richer neighborhoods. We use a general equilibrium model with residential choice and endogenous local spillovers to explore the effects of scaling up this policy and compare them to those of alternative neighborhood-specific policies. 

First, we show that when we scale up the MTO, general equilibrium effects reduce the beneficial impact of the policy on the future income of children of voucher-recipient families. Moreover the policy reduces the welfare of families living in the destination neighborhood, driving down city-wide welfare gains. We then consider two different types of place-based policies. The first one introduces a transfer for all families living in the poorest neighborhood and, differently from the MTO, realizes welfare gains on average for families living in all neighborhoods. However, by attracting families in the poorest neighborhood, it induces higher residential segregation and inequality over time. The second one uses the same resources to invest in local institutions, such as public education, that directly improve the neighborhood spillover. This type of policy is less effective on impact, but realizes larger welfare gains over time, while also reducing both inequality and residential segregation.