Abstract: We propose an elementary spatial equilibrium theory with heterogeneous households holding general non-homothetic preferences. Cities are endowed with heterogeneous consumption and production amenities. In equilibrium, desirable and productive locations command high housing prices. So long as housing is a necessity, these locations are disproportionately inhabited by high-income earners who are relatively less affected by high housing prices than low-income earners. We clarify how this source of sorting complements other potential sorting forces in spatial equilibrium models, namely, comparative advantage in production and heterogeneous preferences for locations. We show how to measure changes in welfare inequality across income groups in a theoretically-consistent way when housing is a necessity, extending the approach

popular in models with homothetic preferences.

For further information contact sara.picciallo@unibocconi.it