This paper investigates the role of preferences for social interactions or outcomes in determining observed patterns of racial segregation. In the theoretical section, consumers maximize utility by allocating time between personal time and social interactions within their neighborhood, and the dual of this problem is used to investigate the bidding and sorting of households over racial composition. The models suggests that African-American households may outbid white households to reside in white neighborhoods, and unlike previous models of segregation this model is consistent with either racial segregation or integration. In the empirical analysis, proxy variables are developed for unobservable attributes that enter household preferences based on measures of household outcomes and satisfaction, and then specifies an econometric model of residential location choice using those attributes. The paper finds evidence that racial differences in preferences for education can explain a substantial portion, but not all, of the racial segregation observed in 1985 Philadelphia using data from the American Housing Survey.
Ross, Stephen L., "Segregation and Racial Preferences: New Theoretical and Empirical Approaches" (2003). Economics Working Papers. 200204.