Schelling paradox in a system of cities

In this theoretical article, we develop a unified framework that encapsulates: i) — a system of heterogeneous cities, ii) — heterogeneous workers, iii) — the presence of agglomeration economies and congestion forces, and iv) — heterogeneous city composition preferences. We provide a full analytical characterization of the decentralized and centralized economies. Contrary to conventional wisdom, we show that social mixing can constitute a unique and stable equilibrium. We also disentangle the different economic factors that shape within- and across-city social/income dispersion. We also find that individuals’ preferences be overturned at an aggregate scale, which is consistent with Schelling paradoxical findings. We then offer a rationale for these counterintuitive results. Last, we demonstrate that the decentralized economy is not optimal but can be restored by local subsidies.