Residential segregation is a key public policy issue that is driven by economic fac-

tors on the one side, and individual attitudes towards ethnic diversity on the other

side. We assume a modeling framework that consists of a population of two ethnic

groups, a rental market for each neighborhood, and household's utility which depends

on consumption and housing. Accounting for income disparities and heterogeneous

preferences for living in ethnically diverse neighborhoods, we examine the residential

segregation patterns that occur when households make their neighborhood choice by

taking economic and diversity related aspects into account. The investigation reveals

that ethnic income disparities and heterogeneous preferences are antagonistic forces

such that a certain level of income stratification is the price for residential integra-

tion. In light of these findings, we discuss to which extent and under which conditions

housing subsidy policies can favor residential integration.