Abstract
How do neighborhood characteristics influence economic development? How do social cleavages operate within cities in developing countries? This study is among the first of its kind to be conducted in the developing world, and focuses on India to provide answers. Given the limitations of publicly available sources of secondary data, we rely on a spatially representative household survey that we designed and conducted in the cities of Hyderabad and Mumbai. We conduct an inequality decomposition exercise to show that a substantial portion of intra-city income inequality is explained by social cleavages such as classes and social groups (caste and religion). While urban inequalities are stark, we show that spatial co-existence of classes and social groups (a phenomenon that we term as “Grayness”) is pronounced. At the neighborhood level, Grayness has a strong and positive impact on development outcomes. We establish this result by using an instrument that captures intra-city variations in the history of industrialization in these two cities. We discuss the policy implications of our findings.
