Association for Public Policy Analysis & Management

In this paper we investigate how households optimally choose a neighborhood in which to live, how neighborhoods affect the ability of children, and how housing vouchers affect neighborhood choices and child ability. These topics have been studied individually before, but our approach is different and our data are new. We show that some neighborhoods can significantly improve child cognitive ability, but parents differ in their willingness to pay to move to these neighborhoods. We use our framework to simulate the impact of a number of housing-voucher policies, including a Moving-to-Opportunity (MTO) type experiment. We find that neighborhood choices are sensitive to rental prices for the poorest households in our sample, and this is key to predicting the impact of housing-voucher policies on choices and outcomes. We conclude by discussing the costs and benefits of a targeted housing voucher that can only be applied in a small set of neighborhoods that we estimate to substantially improve child ability. For context, 10 years of exposure for a child to one of the tracts in the eligible set of neighborhoods improves annual wages in adulthood, on average, by nearly $3,000 per year. For Los Angeles, the area of our study, we compute a "surplus-maximizing" voucher amount of $300 per month, in which the marginal societal benefit on an additional dollar of voucher offer is equal to the marginal cost. We also compute a "break-even" voucher amount of $700 per month in which total societal benefits are equal to total costs.

Our paper has three main sections, and the first two reflect contributions to distinct literatures. In our first section, we specify and estimate a dynamic model of optimal location choice using detailed micro panel data. We estimate the model using panel data from the Federal Reserve Bank of New York Consumer Credit Panel / Equifax (CCP). We restrict our sample to renters residing in Los Angeles County. We study renters to mitigate the influence of availability of credit on location choice, and we focus on Los Angeles County to match our results with estimates of the impact of neighborhoods on child ability. Our estimation sample from the CCP data consists of more than 1.75 million person-year observations. This huge sample allows us to estimate a full vector of model parameters for many discrete "types" of people. Our use of many types in estimation captures permanent heterogeneity in preferences for neighborhoods, as compared to an estimation framework with fewer types which would necessarily attribute more systematic variation in neighborhood choices across households to period-by-period unobservable shocks. In our second section, we estimate the impact of neighborhoods, in our case specific Census tracts in Los Angeles County, on the cognitive ability of children. In the final section of the paper, we overlay the results of the previous two sections to study how various housing-voucher policies affect optimal location choices of households and the ability of children. We begin this section with an analysis of the Moving-to-Opportunity (MTO) experiment and conclude by analyzing alternative policies.