Neighborhood Effects and Housing

This chapter presents a number of approaches that economists have used in studying neighborhood effects in housing markets. It emphasizes how individuals in effect choose neighborhood effects, or more generally social interactions, via their location decisions. The chapter looks constructively at neighborhood effects and rather than reviewing the role of neighborhood effects as mere externalities that might interfere with locational equilibrium, and focuses on what we have learned empirically about their role by observing locational decisions along with individual and group characteristics. It examines several classes of models which economists have relied upon in exploring the role and empirical significance of neighborhood effects that originate in housing markets. It takes the concept of neighborhood effects quite literally as arising in residential neighborhoods. For precisely this reason, the chapter emphasizes how we may detect empirically the presence of neighborhood effects when they may be priced by housing markets and be capitalized into housing values and rents. The chapter focuses on models that are empirically relevant and help identify neighborhood effects, and discusses actual empirical findings.