Inequality, neighbourhoods and welfare of the poor

Abstract

This paper investigates how neighbourhood e!ects interacting with income inequality a!ect poor people's ability to access basic facilities like health care services, schooling, and so on. We model this interaction by integrating consumers' income distribution with the spatial distribution of their location and explore the consequences of an increase in income inequality on the welfare of the poor in general, and their access to market in particular. We nd inverted-U shape relationships between income inequality and market access and welfare of the poor: if we compare a cross-section of societies, the poor community as a whole is initially better-o! living in relatively richer societies, but, beyond a point, the aggregate market access and consumer surplus of the poor starts declining as the society becomes richer. There exist multiple equilibria: a bad equilibrium where all the poor are excluded exists simultaneously with a good equilibrium where at least some poor (if not all of them) get served by the market. We have identied the higher income gap between rich and poor as the key factor that exposes the poor to this complete exclusion possibility. Finally comparing a mixed-income neighbourhood where rich and poor live side by side with a single-income homogeneous neighbourhood we nd that the poor are better-o! living in the mixed neighbourhood as long as the poor income is below a certain feasibility threshold. ! For helpful discussions and suggestions we thank Kaushik Basu, Indraneel Dasgupta, Arghya Ghosh,

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