Seminar 281, International Trade and Finance: Sorting, Endogenous Amenities and Spatial Inequality in Cities

Seminar | October 15 | 4-5:30 p.m. | 597 Evans Hall

 Matthias hoelsztein, UC Berkeley

 Department of Economics

Abstract: In this paper, I characterize and quantify a new economic force underlying observed spatial inequality in cities that is based on simultaneous sorting of skill groups and firms across space. In contrast to recent theoretical and empirical work emphasizing the role of reduced form spillovers to the local skill composition, spatial sorting in my model is driven by variation in localized, skill-specific prices of consumption arising from the interplay of firm mobility, spatial frictions and non-homothetic demand across consumption sectors.
First, I embed these features, as well as reduced form spillovers, in a spatial general equilibrium model of the city. Second, I apply the model's structure to empirically quantify the strength of reduced form spillovers with detailed tract-level data on changes in skill and firm composition for Los Angeles. Accounting for relative changes in consumption prices lowers relative reduced form spillovers by 30-50\% in the data. Third, I calibrate the model using estimated spillovers with and without the price effect channel to assess the differential effects of urban policy counterfactuals on mobility and welfare by skill. In the presence of relative price effects I find that Trump's new Opportunity Zones lead to gentrification in affected neighborhoods but negligible effects in the model with only reduced form spillovers.