A dynamic model of wealth segregation

Abstract

We propose a dynamic model where the real estate market generates wealth segregation within a town. The model develops on the Schelling’s checkerboard dynamics with one main difference: Agents are fully characterized by their wealth, which changes with the progress of the model dynamics. The driver of the segregation is a positive neighborhood externality such that households’ utility is increasing in the average wealth of the neighbors. The identification of a potential function enables prediction of the long-run limiting behavior of the dynamics: Wealth segregation is an endemic result, unless a perturbation at the individual level is introduced. Public policies that mimic the perturbation can reduce wealth segregation.