WORKINGS OF A CITY - LOCATION, EDUCATION, AND PRODUCTION

We model the links between residential choice, education, and producti vity in a city composed of several communities. Local complementaritie s in human capital investment induce occupational segregation, althoug h efficiency may require identical communities. Even when some asymmet ry is optimal, equilibrium segregation can cause entire ''ghettos'' to drop out of the labor force. Underemployment is more extensive, the e asier it is for high-skill workers to isolate themselves from others. When perfect segregation is feasible, individual incentives to pursue it are self-defeating and lead instead to a collapse of the productive sector.