Segregation, exclusion and compensating transfers under a dynamic setting

Anas (2002) has shown that there exist equilibria with exclusion and the payments of economic transfers where whites and blacks are better off than in the case without them. Anas’ model is static so it does not consider important dynamics aspect of this phenomenon. Hence, we have developed a dynamic general equilibrium model of segregation. Our main findings are: there exists a path of transfers such as there is a dynamic equilibrium where whites and blacks are better off with exclusion and transfers; and higher levels of prejudices imply lower levels of aggregated utility. Finally, the effects of a prejudice shock can last between 2 and 30 years, hence policymakers must pay attention to sudden positive prejudice shocks in order to implement policies to reduce their consequences.