This paper provides an estimable general equilibrium theory and empirical analysis of immigrants’ self-segregation into ethnic enclaves and their integration. Immigrants optimally choose their social distance from natives by comparing the psychic cost of changing their social distance to the future benefits of doing so. The benefits include material gains in the labor market and social utility from interacting with neighbors. Social interaction utility within neighborhoods depends on social distance from the average neighbors, and on own and neighbors’ average prejudice. Prejudice evolves in response to the diversity people experience in their neighborhoods. In deciding whether to move to a different neighborhood, immigrants consider the social environment as well as housing costs and wages. They are forward looking, and consider the effects of natives’ outmigration ("White Flight"),the decisions of other immigrants’ to change in their social position, the path of prejudice, and the inflow of future immigrants. The social environment and housing rents in neighborhoods and skill prices in local labor markets are determined in equilibrium. Identification and estimation of the model is challenging for several reasons. A key one is that prejudice and immigrants’ social distance are unobserved, and they are outcomes of a large-scale dynamic game. The paper tackles the identiVcation challengeby applying a new method, developed inHwang(2018b), building onArcidiacono and Miller(2011). The core idea is to exploit noisy proxies for prejudice and immigrants’ cultural preferences measuring social distance in micro panel data, while correcting for missing data and measurement error. To meet the data requirements of the new method, which include proxies for cultural preference and prejudice, low-level neighborhood geocodes, and a sufficiently long panel with a large minority sample, I use the several UK data sets. They include the Millennium Cohort Study, administrative payroll tax records, Census data, and the BHPS/UKHLS panel. I find that the social distance between immigrants and natives decreased between year 2001 and 2015. The most distant immigrants’ share in the sample dropped from 28% to 19% and the intermediate immigrants’ share dropped from 53%to 48%. The estimates indicate that diversity reduces prejudice, although they are imprecise. The high inflow of immigrants since2000 has increased diversity in most neighborhoods, which abated prejudice. Using the structural model, I run two counterfactual experiments. I find that an immigrant entry policy that selects high-income immigrants does not improve social integration.In contrast, a residential mixing policy improves social integration by a small amount by inducing a decline in either prejudice or social distance. The difference stems from the fact that only the mixing policy increases interaction between natives and immigrants. General equilibrium feedback effects help explain why the policy effects are small.
Available online: Link Output from project: 1001968