Location of the Poor: Neighborhood versus Household Characteristics. The Case of Bogotá

Latin American cities are characterized by a high correlation between the location chosen by poor households and their income level. However, it is difficult to identify to what extent they live there by choice –because it maximizes the returns to their efforts- or by restrictions that pull them to locations that make them poorer. We define the former case as unrestricted sorting in the urban economics context, while the latter is assumed to be the commonly used definition of segregation. Distinguishing between these alternatives is difficult because of the circular relationship between poverty and location. People can freely choose a location that makes them poor or they can choose a location because they are poor. This circular causation or endogeneity puts policy making in a complicated spot since it questions the reach of placed-based policies to alleviate poverty and exposes the need to prioritize between these actions and those directed to improving households’ portable assets. Hence, there is a trade-off between investing in education or any other portable asset and investing in local infrastructure. This paper begins establishing a Mincerian profile of households’ income level as the result of its portable assets and their returns. Then an Oaxaca-Blinder decomposition of the income equation over two locations –a periphery and the rest of the city- is used. Based on differences in returns to individual characteristics between the two alternative locations, the impact of space is separated from the impact of portable assets. The main hypothesis is that segregation exists when these returns vary across space. That is when households cannot profit equally across space even if they have comparable characteristics. Results show that segregation, as opposed to individual characteristics, explains one fourth to one third of the mean income difference between locations in Bogotá-Colombia. Further estimations show that access has a major role explaining the impact of location while housing and neighborhood characteristics play a relatively minor role. As such, results question the emphasis that local social policies pay to improve spaces while they could have a greater impact on welfare conditions giving more relevance to the portable assets of the poor.