Recent immigrants tend to locate in ethnic enclaves within metropolitan areas. We examine whether this location pattern gives rise to welfare cultures, i.e., an environment where individual welfare use is influenced by welfare usage in the ethnic group as a whole. Most of the previous literature on the importance of networks is plagued by problems caused by selection and unobserved factors about neighborhoods and ethnicities. To avoid these problems, we use data from an immigrant policy initiative in Sweden, when government authorities distributed refugee immigrants across locales in a way that we argue is exogenous. We distinguish between the quantity of contacts the number of individuals of the same ethnicity and the quality of contacts welfare use among members of the ethnic group. OLS regressions suggest that both the quality and quantity of contacts are positively related to individual welfare use. Instrumental variables estimation yields the conclusion that only the quality of contacts matter.
The estimates are quite sizable. An increase of the fraction of the ethnic group on welfare by ten percent raises the individual probability of welfare use by almost three percentage points.