Working Paper

Strong Spatial Spillovers Determine Neighborhood Shape and Neighborhood Change

Abstract: This paper explores how spatial spillovers define neighborhoods and drive neighborhood change through a stylized computable equilibrium model of income-based residential sorting. We find three main results. First, stronger spillovers create larger, more distinct neighborhood clusters even when the spatial scope of externalities is small. Second, spillovers make neighborhoods resistant to small change but also susceptible to rapid shifts between equilibrium states. Third, stronger spillovers concentrate change at cluster boundaries and isolated locations rather than neighborhood interiors. Extending Schelling-like insights to income sorting dynamics, the model treats neighborhood shape as an endogenous outcome determined by decentralized household location choices mediated through housing markets. The framework helps explain persistent urban segregation patterns, neighborhood resilience, and the geography of neighborhood change, offering new approaches for linking spatial spillovers to urban spatial structure and dynamics.

JEL Classification: R23; C61; D62;

https://doi.org/10.21799/frbp.wp.2026.11

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 2026-02-23

Number: 26-11