Expectations and the timing of neighborhood change

Abstract

We study the role of expectations when agents have a preference for segregation and households face moving frictions. In a fixed environment, there are multiple equilibria: agents' expectations determine whether an ethnic transition occurs. However, the outcome is unique if there is a deterministic trend that gradually makes the neighborhood more appealing to the outside group. It is also unique if the relative payoff from living in the neighborhood is subject to small shocks. In both cases, the insiders must leave at the first possible moment: when the outsiders would outbid them if an immediate ethnic transition were expected. © 2001 Elsevier Science (USA).