Homophily, selection, and choice in segregation models

Schelling's 1971 work on the dynamics of segregation showed that even a small degree of homophily, the desire to live among like neighbors, can lead to a starkly segregated population. One of the driving factors for this result is that the notion of homophily used is based on group identities that are exogenous and immutable. In contrast, we consider a homophily that arises from the desire to be with neighbors who are behaviorally similar, not necessarily those who have the same group identity. The distinction matters because behaviors are neither exogenous nor immutable but choices that can change as individuals adapt to their neighborhoods. We show that in such an environment, integration rather than segregation is the typical outcome. However, the tendency toward adaptation and integration can be impeded when economic frictions in the form of income inequality and housing cost are present.