Nathan Jones

American cities have been growing more segregated by income. A leading explanation is that the growth in income inequality has increased high-income households' willingness to pay to cluster together. Others have blamed it on ever more restrictive housing supply regulation. I show that these explanations are complementary. To study the interaction of these two forces, I develop a quantitative urban model with a novel margin of endogenous housing supply regulation. Municipalities trade off the profits from new construction with the reduction in value of existing housing that it incurs, and I show that this generates a feedback loop between neighbourhood income and regulation. Municipalities endogenously have stronger incentives to tighten regulation for richer neighbourhoods, pricing out poor households and exacerbating spatial inequality. Quantifying my model with publicly available data, I find that the rise in the college wage premium since 1980 explains 40-86% of the increase in income segregation in New York, Los Angeles, and Chicago, and that 6-29% of this effect comes from the endogenous tightening of regulation.