Applied Economics Letters

Residential segregation is known to impose undesirable neighbourhood effects on the population of deprived areas. However, relatively little research so far has examined the urban geography of financial delinquency. Using Germany as a case study, we demonstrate that for part of the population, exclusion from finance is on the rise. In our hedonic pricing analysis based on nationwide data at the 1 km2 grid level, we apply an instrumental variable approach in order to eliminate statistical bias emerging from endogenous household sorting. We find that well-off households are willing to pay a significant premium on their rent to avoid moving to areas where many households face financial difficulty. Further, our findings reveal that as a lower local educational attainment implies a higher risk of credit default, it is likely for financial delinquency to be transmitted across generations. As Europe’s largest economy is known for its comparatively egalitarian income distribution, it is noteworthy that isolation of households in financial distress is increasing. The study recommends community-oriented efforts designed to improve local participation in education, financial literacy and access to finance.