Segregation, exclusion and compensating transfers under a dynamic setting Ra´ ul Conejeros * Department of Biochemical Engineering Pontificia Universidad Cat´olica de Valpara´ ıso and Miguel Vargas † Diego Portales University School of Business Abstract In literature on residential segregation it has been proposed that when whites are preju- diced enough against black people, the payment of economic transfers, in the spirit of the Coase theorem, from white population to blacks, can be used in order to the latter accepting exclu- sion. In particular Anas (2002) has shown that there exist equilibria with exclusion and the payments of transfers where whites and blacks are better off than in the case with no exclusion and no economic transfers. To reach this result Anas developed a static general equilibrium model. Although Anas’ work represents a significant forerunner to the literature on segrega- tion, exclusion and compensating transfer, due to its static nature it has left an important open issue: if current white generations live in a segregated environment the future generation can be more prejudiced, then the level of equilibrium segregation will be higher and, consequently, the needed compensating transfers will be higher too. Therefore the question is if when we consider this dynamic aspect it is possible to find a path of transfers supporting a dynamic equilibrium where whites and blacks have a higher level of utility with exclusion and transfers than with no exclusion. In order to find an answer to this question we have developed a dynamic general equilibrium model considering land, labor and products markets. Our main findings are the following. First, it has been possible to find a path of transfers such as there is a dynamic equilibrium where whites and blacks are better off with exclusion and transfers. Second, higher * rconejer@ucv.cl. † miguel.vargas@udp.cl. 1