Studies ofneighbourhoodeffectsoften attempt to identify causal effects of neighbourhood characteristics on individual outcomes, such as income, education, employment, and health. However, selection looms large in this line of research and it has been repeatedly argued that estimates of neighbourhood effects are biasedas people non-randomly select into neighbourhoods based on their preferences, income,and the availability of alternative housing. We propose a two-step framework to help disentangle selection processes in the relationship between neighbourhood deprivationand earnings. We first model neighbourhoodselectionusing adiscrete choice framework and derivecorrection components to adjustparameter estimates in a subsequentneighbourhood effectsmodel fortheunequal probability that an individual‘choosesto live ina particular area. Applying this technique to administrative data from the Netherlands, we find significantinteractions between personal and neighbourhood characteristics inthe selection model.This confirmsindividual differences in neighbourhood preferences; individuals non-randomly select intoneighbourhoods. The baseline neighbourhood effects model reveals a significant effect of average neighbourhood income on individual income. When we include correction components for the differential sorting of individuals into specific neighbourhoods, the effect of neighbourhood income diminishes, but remains significant. These results suggest that researchers need to be attuned to the role of selection bias when assessing the role of neighbourhood effects on individual outcomes. Perhaps more importantly, the strong, persistent effect of neighbourhood deprivation on subsequent earnings suggests that neighbourhood effects reflect more than the shared characteristics of neighbourhood residents [...]
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