Market factors affecting spatial heterogeneity among urban neighborhoods

Abstract Institutional factors perpetuating segregation in urban neighborhoods— redlining by lenders and insurers, steering by brokers, and discrimination by owners—have attracted much attention recently. But natural market forces (demand, supply, and equilibrium price adjustment) can also create neighborhood heterogeneity in income, race, and housing characteristics. This article establishes a framework to examine the market forces that create spatial clustering of households. On the demand side, differences in resident preferences and incomes lead to clustering; on the supply side, differences in cost functions, created by market specialization or location‐specific features, are important. Equilibrium price adjustment reinforces tendencies toward heterogeneity and leads to differential affordability patterns. Bid‐rent and other models of residential location, discrimination in urban housing markets, and the Tiebout model are discussed. A research agenda is proposed to measure neighborhood heterogeneity, isolate its influence on educational and employment opportunities, and evaluate policies for ameliorating its adverse effects.