Knowledge that Transforms

This paper estimates people’s taste for living with own-ethnic-group neighbors using variation from a natural experiment in Singapore: ethnic housing quotas. I develop a location choice model that informs the use of policy variation from the quotas to address endogeneity issues well-known in the social interactions literature. I assembled a dataset on neighborhood level ethnic proportions by matching more than 500,000 names in the phonebook to ethnicities. I find that all groups want to live with some own-ethnic-group neighbors but they also exhibit inverted U-shaped preferences so that once a neighborhood has enough own-ethnic-neighbors, they would rather add a new neighbor from other groups. Welfare simulations show that about 30% of the neighborhoods are within one standard deviation of the first best allocation of ethnic groups.

We develop a model where: (i) banks take deposits and make investments; (ii) their liabilities facilitate third-party transactions. Other models have (i) or (ii), not both, although we argue they are intimately connected: we show that they both emerge from limited commitment. We describe an environment, characterize desirable allocations, and interpret the outcomes as banking arrangements. Banks are essential: without them, the set of feasible allocations is inferior. As a technical contribution, we characterize dynamically optimal credit allocations with frictions, show they involve backloading, and analyse how this interacts with banking. We also confront the theory with economic history.