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Environmental and Urban Economics

Matthew E. Kahn , Professor of Economics at USC

Updated: 2017-11-15T04:29:38.374-08:00


Can an Economist "Commune" with Nature?


Here are two photos I took of our new neighbor.



Good Neighbors vs. Yard Rage: A Test of the Coase Theorem


The NY Times challenges the Coase Theorem today without ever mentioning Coase.  Several examples are given of "neighbors going to war against each other" over low stakes stuff.   To an economist, the puzzle here is why isn't there more "peace and love"?  The fight didn't have to occur. Instead, they should have traded with each other.  Let me set up an example and let's think this through. 

You and I are neighbors and I use a leaf blower on Saturdays that makes you nuts.  You suffer $80 of pain each time I use it when you are home.  I would suffer $50 a week in "pain" if my lawn is filled with leaves.  Given that we are neighbors and can easily communicate and you know that I have the right to use my leaf blower and you know that I"m the cause of the noise, we can solve this issue by trading.  Suppose you give me $30 each week and in return I make sure to only use my leaf blower when you aren't home.  Both of us are made better off by this "trade".

Of course, you would prefer not to pay me but nothing is free.  Why don't these offers occur more often?

Another example is the famous fight between Bono and Billy Squier.    Note that my solution involves no lawyers, no broken ribs and no laws.  Yes, there is a mutual agreement on who has the "property rights" .   When you enter a Starbucks, the buyer of a cup of coffee knows that he does not have  a right to a cup of coffee.     What is the difference between local noise pollution and a cup of coffee?

As Coase knew, much of the modern economy is actually a fight over who actually has the initial property rights. If we could all commit to a common agreement over who owns what and never renege on this deal, our society would be much richer.

Ranking Economists


This report card suggests that I need to invest more time in the quality of my Ph.D. students.You can also obtain rankings of top institutions and economists in the regions of your affiliated institution(s):United States (you rank 203 of 10448, top 2%)California (United States) (you rank 36 of 1080, top 4%)Pacific States (United States) (you rank 37 of 1280, top 3%)These statistics are based on data from 51320 authors. Rankings for the top 5% authors are available here.MethodYour rankPercentile in RePEc (top x%)Your scoreAverage score at affiliation 1% with null score in RePEcAverage Rank Score3371370.63NA0Number of Works697218970.730Number of Distinct Works431115643.760Number of Distinct Works, Weighted by Simple Impact Factor16714729.431159.020Number of Distinct Works, Weighted by Recursive Impact Factor2131699.92164.720Number of Distinct Works, Weighted by Number of Authors4411104.2729.410Number of Distinct Works, Weighted by Number of Authors and Simple Impact Factors22612490.73633.260Number of Distinct Works, Weighted by Number of Authors and Recursive Impact Factors2731366.5390.740Number of Citations66022429975.8316Number of Citations, Discounted by Citation Age4771678.300248.5616Number of Citations, Weighted by Simple Impact Factor619229161.009070.8916Number of Citations, Weighted by Simple Impact Factor, Discounted by Citation Age45511735.920495.0716Number of Citations, Weighted by Recursive Impact Factor66723754.961090.7916Number of Citations, Weighted by Recursive Impact Factor, Discounted by Citation Age5081297.14078.9916Number of Citations, Weighted by Number of Authors56021432.17482.2116Number of Citations, Weighted by Number of Authors, Discounted by Citation Age3951393.77122.6216Number of Citations, Weighted by Number of Authors and Simple Impact Factors567216633.094502.8816Number of Citations, Weighted by Number of Authors and Simple Impact Factors, Discounted by Citation Age3871986.430243.2716Number of Citations, Weighted by Number of Authors and Recursive Impact Factors62922095.12539.6516Number of Citations, Weighted by Number of Authors and Recursive Impact Factors, Discounted by Citation Age4481165.77038.2716h-index38212613.1516Number of Registered Citing Authors60321374475.9120Number of Registered Citing Authors, Weighted by Rank (Max. 1 per Author)62221042.22353.3220Number of Journal Pages41011536489.3414Number of Journal Pages, Weighted by Simple Impact Factor510128025.809761.0214Number of Journal Pages, Weighted by Recursive Impact Factor68523781.621322.8514Number of Journal Pages, Weighted by Number of Authors3141945.08262.2214Number of Journal Pages, Weighted by Number of Authors and Simple Impact Factors474116329.105248.0414Number of Journal Pages, Weighted by Number of Authors and Recursive Impact Factors63722187.54727.0414Number of Abstract Views in RePEc Services over the past 12 months551100931394.780Number of Downloads through RePEc Services over the past 12 months13912171408.744Number of Abstract Views in RePEc Services over the past 12 months, Weighted by Number of Authors6115803637.650Number of Downloads through RePEc Services over the past 12 months, Weighted by Number of Authors11711168175.024Euclidian citation score13003414.16121.4716Strength of students162441665.6146.195Closeness measure in co-authorship network86024.55NA23Betweenness measure in co-authorship network549210.4900NA45Breadth of citations across fields424191.50NA23Average Rank Score (Last 10 Years)1131134.05NA7*: fewer than 5 scores available for this institution.Institution h-index is defined differently from author h-index.Similarly ranked authorsThese peers are ranked around you and are listed in random order:Giovanni PeriMartín UribeLaurence BallAthanasios OrphanidesTakatoshi ItoAndrew AbelRoger B. MyersonRichard H. ClaridaHarvey RosenEdward E. LeamerMarcel FratzscherThomas R. PalfreyViral V. AcharyaGary GortonAndrew ClarkCharles R. NelsonNorman V. LoayzaNarayana KocherlakotaSteven J. DavisJong-Wha Lee[...]

Urban Climate Change Adaptation and Local Real Estate Markets


For those who wonder if a Department Chairman can get some work done, here is the introduction of my new paper that I will present at the Hoover Institution on 11/8/2017.Urban Climate Change Adaptation and Local Real Estate MarketsMatthew E. KahnUniversity of Southern California and NBERIntroductionThe major productivity hubs in the United States are located in coastal areas such as San Francisco, Seattle , New York City and Boston (Hsieh and Moretti 2017).  In each of these areas, a set of high technology firms and high human capital workers have co-agglomerated creating highly productive clusters.   These cities both attract talent and the close physical proximity between these workers and firms causes better matching between workers and firms such that cross-firm learning takes place (Combes et. al 2012, Glaeser 1998,  Rosenthal and Strange 2004).Such coastal productivity centers raises concerns that natural disaster risk and climate change will impose enormous costs for the U.S  because it could disrupt economic activity.  In early September 2017,  Hurricane Harvey shocked the Houston economy and Hurricane Irma significantly damaged Florida. These events highlight how natural disasters can impact real estate capital.  While the science of climate change features many open questions, we have an increased understanding that different geographic regions will face more extreme temperature and rainfall events and that tail risk of severe natural disasters could worsen (see economic consequences of these geographic shocks hinges on how and where we build our cities.  Over decades, we have made durable investments in capital and infrastructure that place millions of people and billions of dollars of capital in areas that could be at increased risk of sea level rise and other challenges posed by climate change (Changnon et. al. 2000, Pielke et. al. 1998, 1999).Zillow’s researchers have made scary predictions about the aggregate capital losses (perhaps $400 billion in Florida alone) that might occur in the year 2100.[1]  This prospective research overlays maps of current coastal assets with different scenarios of future sea level rise.   An emerging climate economics literature studies the historical relationship between geographic places (such as nations or counties) and examines how their economic growth and population growth co-varies with climate conditions (Hsiang 2016). This research has documented a negative correlation between average temperatures (i.e summer heat) and economic growth (Deryugina and Hsiang 2014).    The Lucas Critique teaches us that past historical relationships may not yield good forecasting rules if economic decision makers reoptimize “as the rules of the game change” (Lucas 1976).  While Lucas originally focused on how individuals respond to changes in government policy, this same logic applies in thinking through how individuals respond to changes in climate patterns. Starting with the early work on rational expectations, economists have emphasized that investment patterns are a function of future expectations (Lucas and Prescott 1971).  If investors “know that they do not know” the likelihood of fat tail risks, they will be less likely to make irreversible large sunk investments.  Such rational agents will instead seek a series of less costly investments that offer the option to wait and see how the threat a specific area faces (Bunten and Kahn 2016).  Expectations of changing climate conditions drives investment patterns and these investments facilitate the creation of real estate structures, neighborhoods and cities that are more robust to the major challenges that climate change will pose.  For example, areas in Florida that flood during hurricanes will be more likely to face this same risk in the future.  Such geographic predictability creates the possibilit[...]

Optimism on Climate Change Adaptation: Lessons from Marathon Races


Michael Greenstone has written an excellent piece about how climate change is likely to affect marathon races and the runners.  While the headline hints at "doom and gloom", the real meat of the article is highly optimistic about our ability to adapt to this outdoor stress.    The piece has a cliched paragraph listing the litany of challenges we will face but the historical record highlights that the death rate from disasters is declining quickly over time and that induced innovation will step up to address several of the challenges that climate change will pose. Let's be clear, this is the Julian Simon vs. Paul Ehlich debate all over again.  Economists, are you with Simon or not?  My 2010 Climatopolis book anticipated these themes.  In late 2016, I sketched my evolving thinking in this PERC piece.  Back, to Dr. Greenstone;Here is a direct optimistic quote:Marathons will be no exception. The organizers of the New York race will probably not want their event to be one where it is difficult, or perhaps even impossible, for people to set their personal best or to lower the world record. So they may want to adapt by moving the marathon to later in the year.At the same time, runners may switch from the New York City Marathon to others held in cooler climates to find the perfect temperature at just the right time of year. Could a Montreal Marathon be among the world’s most prestigious by 2050?Athletic equipment companies will surely develop new technologies to aid adaptation as well. For runners, the breathable mesh and cooling towels of today could easily be traded in for shirts with built-in air-conditioners. Seem far-fetched? They already exist. Indeed, I was one of the authors of a recent study of just how powerful a role technology can play in helping people adapt to warmer temperatures. For example, the rise of air-conditioning has reduced the mortality consequences of extremely hot days in the United States by more than 70 percent since 1960.Marathons and marathon runners appear likely to be able to adapt to climate change with relative ease through changes in when, where and how. [...]

Ecological Economics Makes a Comeback!


The WSJ has published a great piece highlighting the wonders of free markets.  In the recent past, U.S manufacturers and consumers sent their waste to China.  China took this combination of useful elements and garbage and extracted some reusable materials such as steel.  Recently, China has announced that it will no longer accept such U.S exports of toxic materials.  Why?  Siqi Zheng and I provide an answer in this 2017 JEP paper.   

From the basic laws of supply and demand, given that China no longer demands these materials;  the equilibrium price of these used materials has fallen.  The WSJ discusses how this is creating a boom in the U.S for businesses that can think about to use this "waste".  A key idea in ecological economics is how to transform one sector's output into a productive input.  So, if a restaurant creates used cooking oil from frying food and this cooking oil can be used by a car to power it , then this is a closed loop ecological cycle. 

The article in the WSJ goes on to discuss the capital investments that the new U.S firms will need to make to effectively use the cheap recycled material as inputs in their production process. I view this piece to be highly optimistic about the nimbleness of the U.S economy in the face of changing market conditions. 

The Value of Structural Econometrics: The Case of China's One Child Policy


Science Magazine has published an interesting blurb about a Demography piece that claims that China's One Child Policy reduced this nation's total population by a billion people.   How?  The piece claims that by the year 2060 that there would have been an extra billion people in China in the absence of the policy!   We all agree that it is crucial to measure the causal effects of this policy but how does one do this?

There is a fundamental missing data problem.  For every woman in China during the years when the policy was in place, how many children would she have had in the absence of this constraint?  If she would have had the same number of children then the policy wasn't binding!

By estimating a structural econometrics model, one can conduct such a policy counter-factual.  Hilary Clinton only had one child.  My wife only has one child.  Some women choose to have only 1 child (even without a government restriction).


1.  women's wages rise with education and among the highly educated,  people with STEM and quantitative degrees earn more
2.  A child's quality is an increasing function of the time that parents spend with the child.  This time effect is diluted if the parent has multiple children.
3. urbanites urban higher wages than rural people
4.  Chinese apartments in cities are highly expensive and an extra bedroom is extremely costly.

These 4 facts yield several predictions;

For the most educated urban women in China, the government's policy is less likely to bind.  For those who value child quality (having the next Einstein), the government's policy is less likely to bind.  So, this policy was really binding for farmers.  Middle class people who are urbanized are unlikely to be able to afford to have a second child.  Why?  The woman would sacrifice too much urban labor income and their rent for the two bedroom apartment would be too high.

As China's urbanization and educational attainment accelerated, the one child policy becomes less and less binding as more women aspire to be the Chinese version of Hilary Clinton.

A structural model would take a formal stand on a woman's utility function (defined over private consumption, quantity of children and quality of children) and would take an explicit stand on the production function of child quality as a function of market inputs and parental time.   By living in a city, the same person has a higher wage (and thus a higher opportunity cost of having a child) and will face higher rents for an extra bedroom.  The researcher would solve for the optimal fertility with and without the one child policy constraint. This constraint states that the family cannot have more than 1 child but if the optimal fertility is 1 child then the policy isn't binding.

My claim is that education and urbanization rise in China, this is not a binding constraint. There would not be an extra billion people in China without this policy.

For some formal academic research on fertility read these.

Amazon Recruiters Visit USC Economics


I am very pleased to welcome Amazon's recruiters to USC Economics.  Our talented graduate students are eager to speak to this amazing firm.   I just bought a book by Eli Broad on Amazon last night.  Our department's effort to raise the quality of our program is paying off!


The Costs of Paying for "Performance": The Case of Chinese Universities


The NY Times has published an excellent piece on the unintended consequences of pay for performance incentives introduced at Chinese universities.  This type of "Freakonomics" highlights several issues in modern economics.   Back in 2000, Ed Lazear wrote a clean AER paper  where he studies how productivity changes at a windshield replacement firm when it switches over to "pay for performance".  He finds that workers work harder when their compensation is tied to "output" rather than to how many hours have passed (i.e a fixed wage per hour).

In the case of research, what is "output"?  As the NY Times article highlights, China's universities have introduced a $ pay bonus system such that publications in top tier journals (think of Nature or Science) yield huge % increases in pay.  This bonus system leads young scientists to devote more effort but the Times article focuses on a second dimension of effort.  The Times argues that this incentive system contributes to cheating through faking data.

The Times article goes on to say that another problem in the Chinese system is that the universities do not have Deans who can judge excellent work. In this case, the journal editors are the judges and the journal editors can be tricked by forged data.  This issue arises in academic economics.  The senior faculty determine who is promoted in a department. If the senior faculty can "read the papers", then the journal names where the papers are published matters less because the senior faculty has the confidence to make up their own minds about the quality of the work. In contrast, if the senior faculty are insecure and don't know a field of scholarship then they will simply "count papers" weighted by the prestige of the journals where they are published.

Everyone knows that it is easier to count output than to judge its quality. In the case of Lazear's windshields, the variation in quality is small because a machine makes the windshields and then duded glue them in to the car. In the case of academia, the variance of output quality is huge. 

Competition across universities in terms of seeking to rise in the national rankings will reward those schools who show "good judgment".

In standard Principal/agent models, the agent chooses her "effort" level and effort is costly but you can imagine models that distinguish between productive effort (learning new math techniques) versus socially unproductive effort (i.e cheating).  How does the principal design a contract to encourage the former and to discourage the latter?

The Holmstrom and Milgrom (1991) model is relevant here.

The Challenge of Phasing Out Coal: Compensating Capital but not Labor


Michael Bloomberg understands the Coase Theorem.  He has proposed to buy and then shut down some coal fired power plants.   Read Haarstad's 2012 JPE paper on this general topic of environmentalists purchasing coal and leaving it in the ground.  Note that this approach isn't a takings. The coal interests have the property right to use their coal but choose to sell this right. 

But, what about the coal miners and their communities?  Who is compensating them for giving up their life and traditions?  Can they easily transition and become "green jobs" workers?  Unfortunately, I do not think so.  Eyer and I discuss these points in this 2017 paper.  Such a "takings" from these workers is one cause of the Trump coalition. 

What Does an Economics Department Chair Do All Day Long?


I have now completed my first two months as the Chair of USC Economics.   It is my impression that the University of Southern California fascinates outsiders.  People know that Los Angeles is a wonderful sunny city. People know that USC is a private university raising a large amount of money.  People know that there are very few strong private universities west of the Mississippi.    USC is catching up with its main rival (UCLA) and seeks to be "Stanford South".  The Football team is ranked #14 and the Economics Department is ranked #20 on Repec.Given these points, what do I do?   I read and respond to a lot of email and I attend many meetings.  USC Economics is the largest major on campus.  I am working hard to improve our major. Some of our majors love economics while others like economics. I want to have a flexible (and challenging) major that pushes our most ambitious students while still delivering for the median student.  We are developing our network with our alumni to help place our students in great internships and jobs.   We are fleshing out offerings in computer science, economics writing, public speaking and applied econometrics to help push our students where they want to go while providing them with the rigorous tools that economics can deliver.   Our MA program is large and we are investing to upgrade it.  A leading econometrician from Netflix will be teaching a class for us in the Spring. We are inviting in leading experts to present public lectures.Our PHD program has traditionally been strong in econometrics, development and experimental economics.  We seek to build on this strength by broadening into environmental economics, macro/finance and political economy.   A serious PHD program both trains students well and helps them to land high quality jobs.   We will attract better students if we can deliver on this front.   We are restructuring our PHD program to improve the mentoring and the students' transition to doing independent research.The Chairman not only works to improve the educational mission but also engages in fundraising and faculty recruiting.  As Los Angeles and USC both become increasingly desirable areas to live and work, more prominent economists are hinting to me that they want to join us in the sun.   While I would love to grow our faculty from the current size of 28 to 82, the Deans place some limits on our growth. I spend a fair bit of time talking to our Deans about our growth plan and how we will finance this growth.    We will be hiring 3 new professors this year. Our department is growing and this improves morale. One worry of mine is our physical location.   To maximize the intellectual synergies between the various economics units on campus, we seek to co-locate with the Marshall School in the middle of campus. For historical reasons, the Economics Department has been banished to the periphery of campus (close to a Taco Bell).   For us to maximize our potential and to build up Economics at USC to the level it has achieved at Stanford and UChicago, we need to move to the middle of campus.I spend my time building up the internal quality of our department and engaging in outreach with successful friends of my department and by connecting with other units on campus.  There are many meetings because we have so much potential. I now see that the challenge a department chair faces is "toggling" back and forth between administrative functions and returning to my "real job" of writing academic papers and creating new ideas. I moved to USC from a nearby school because I saw its great potential.  During my two years as Chair, I want [...]

A Few Thoughts About Puerto Rico and "Climate Refugees"


Could a silver lining of the damage caused by Hurricane Maria be that migration from Puerto Rico to more productive places in the continental U.S accelerates?   While the popular media is discussing the challenge caused by "climate refugees", I have argued in the past that migrants are self interested and will look to market signals of real wages to identify which areas will value attracting them.   Here is a piece I wrote about "climate refugees" in May 2016.  Here is another one I wrote in 2014.  As migrants move to more productive places, their families will benefit and they will enrich the areas they move to by increasing the demand for local housing and by giving local employers more workers to choose among.  Yes, incumbents will face more competition for rents and wages but these general equilibrium effects are unlikely to be large.

For those who prefer to read peer reviewed economics articles (rather than blog posts), I recommend Harold Uhlig's 2011 piece about East Germany. He writes   "In this paper, I have documented the ongoing exodus from rural East Germany, especially among the young population. I have documented that wages there remain low and unemployment high, despite levels of education and training that are on par with Western Germany. To understand these facts, one must seek a model which allows agents to improve their situation by migration while at the same time keeping unemployment higher in the sending region."

In the case of Puerto Rico, social networks have anchored many people to remain in this area but these individuals are likely to have a brighter economic future if they migrate to the continental U.S.  While this transition will impose costs, it will improve their children's education and opportunities.  Many parts of the continental U.S feature low home prices and need young people to move there. There would appear to be gains to trade in the local labor markets. So, I do not foresee a "refugee crisis"?  Instead, I see a silver lining from a very painful shock.

Sane Discussion of Disaster Adaptation in the NY Times


Here is a very nice article  on the "small ball" of building up resilience to climate change.   The interesting empirical question is what % of home owners will be as reasonable as Michele Nilsen?   Since 2010, I have been arguing that this is how we will adapt.  Climate change adaptation offers "the test" of rational expectations vs. behavioral economics theories.   To read my thoughts on these issues, here are a few of my recent papers; Bunten, Devin & Kahn, Matthew E., 2017. "Optimal real estate capital durability and localized climate change disaster risk," Journal of Housing Economics, Elsevier, vol. 36(C), pages 1-7. Matthew E. Kahn, 2017. "Will Climate Change Cause Enormous Social Costs for Poor Asian Cities?," Asian Development Review, MIT Press, vol. 34(2), pages 229-248, September. Matthew E. Kahn, 2016. "The Climate Change Adaptation Literature," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 10(1), pages 166-178. Kahn Matthew E., 2015. "Climate Change Adaptation Will Offer a Sharp Test of the Claims of Behavioral Economics," The Economists' Voice, De Gruyter, vol. 12(1), pages 25-30, August Kahn, Matthew E., 2015. "Climate Change Adaptation: Lessons from Urban Economics," Strategic Behavior and the Environment, now publishers, vol. 5(1), pages 1-30, June.Matthew E. Kahn & Daxuan Zhao, 2017. "The Impact of Climate Change Skepticism on Adaptation in a Market Economy," NBER Working Papers23155, National Bureau of Economic Research, Inc.[...]

USC #15 and UCLA #25 in the new WSJ 2018 Rankings for Colleges


The methodology  yields this ranking.Top 201. Harvard2. Columbia3. MIT3. Stanford5. Duke6. Yale7. Caltech8. Penn9. Princeton10. Cornell11. Brown11. UChicago11. WashU14. Rice15. Northwestern15. USC17. Dartmouth17. Johns Hopkins19. Emory20. Carnegie Mellontop 5 LACs:22. Williams23. Amherst26. Pomona28. Wellesley30. Swarthmoretop 5 public universities:25. UCLA27. UM Ann Arbor33. UNC Chapel Hill40. UC Berkeley43. PurdueUSC is ranked appropriately as is UCLA.   Keep in mind this is a ranking of the college.   USC's students are really good.  They are extroverts, articulate and "fast on their feet".   UCLA featured many more students who crammed for exams and excelled at this "ancient art" but lacked creativity and versatility.  [...]

Gender and Research Partnerships in Economics


Given the recent discussion about women's opportunities in Silicon Valley and in academic economics, I took a look at my own record.  I have published six books.  I wrote 4 by myself and 2 with co-authors.  Both of my co-authors (Dora Costa) and (Siqi Zheng) are women.  

In terms of journal articles, out of my roughly 130 publications --- I see that I have published 40 papers featuring at least 1 female co-author and I have worked with 10 different women on these papers.  

I have written 30 papers that each have at least 100 Google Scholar cites.  11 of these papers feature at least 1 female co-author.  

REPEC could add diversity criteria for ranking economists.  It wasn't my intent to rise on this margin but I do like what I see.  

Economics is the Most Popular Major at USC


The USC Daily Trojan has published an article that I like.  I moved from UCLA to USC because I saw the private university's momentum and ambition.  My department's goal is to be as good as our football team.  The University aspires to be Stanford.  That's a good goal and we are working to achieve this.  The University of Chicago's economics department has been rewarded for building up a very strong major. Their Deans have invested heavily in that department.  I hope (and expect) a similar dynamic to play out at USC.  

Bitcoin Mining and Energy Subsidies: The Case of China


Erin Mansur and I have a well cited 2013 JPUBE paper documenting that energy intensive firms cluster where energy prices are low (the paper has several other ideas!).  Siqi Zheng, Jianfeng Wu and Weizeng Sun and I have a 2017 JUE paper studying China's industrial parks.  In these parks, land, capital and electricity is often subsidized.   The NY Times reports today on an obvious synergy of  these two papers.  Energy intensive bitcoin companies in China are locating in cheap energy places and mining the coins. This produces cash and carbon because in places with cheap power in China, the power is generated by coal.

This reminds me of a story.  When my son was age 10, he would keep his computer on at night to mine bitcoins. He figured out that I pay his electricity bill (his costs) but that he would keep the revenue on any bitcoins he mined. He thought that he had a "money pump" until I reminded him that he will inherit all of our wealth and that the overall profitability of his operations was negative.  The same logic applies to China's firms today if you substitute the words President Xi for Matthew Kahn.
Environmental economists haven't done enough work on "perverse subsidies".  As governments keep gas prices and fossil fuel energy prices low, how does this affect the scale, composition and technique of industry? We have much more work on the vehicle fleet on this topic but not enough about the industrial and commercial sectors.

Peer to Peer Disaster Relief; Hayek vs. Titmus


As I read the NYT and WSJ, I see similar stories that the Big Data Smart Phone era reduced the suffering caused by Hurricanes Harvey and Irma as people used their phones to "trade with each other" such that private first responders saved many people.  Permit me to ask an economics question, should the suppliers of rescue services be compensated?

They will receive praise but should they receive money?  Uber drivers are paid. What is the difference between Uber and disaster relief?

Titmus vs. Hayek

Who is the Great Titmus?  He argued back in 1970 that paying for stuff such as blood leads suppliers to recoil and supply less.   What would Hayek say?

If an App programmer created a disaster market place "Uber", would more people be saved or would fewer? How would surge pricing work? Who should be allocated the scarce rescue services during a crisis? If the supply curve is elastic, will more first responders be available during the surge?  Do the potential first responders place themselves at risk during a disaster by sticking around rather than evacuating?

Do markets work in the middle of a crisis?

Does Culture Matter? The Case of Academic Economics


On my twitter feed today, I stumbled across this very interesting (and depressing) post by Claudia Sahm. MIT's great Peter Temin wrote this piece about "culture" 20 years ago.   He discusses Alberto Bisin's early work on culture.   Here is a great Vox EU piece by Bisin on culture that poses some intellectual puzzles for comparative economists.Dr. Sahm's piece  raises a fascinating question;  does academic economics have a bad culture?   The goal of academic economics is to build up knowledge to provide a scientific method for judging the efficiency and equity consequences of different public policies and to train the next generation of economists. Does our culture further this goal? If not, how did we get into this equilibrium and if we are in a "bad equilibrium" where we are losing talent because of our bad culture, how do we switch equilibrium?To even begin to think about this question requires delving into a tough-counter factual;  who would enter our field (selection) and how would senior incumbents allocate their time and effort (treatment) if we had a different culture?  Would junior incumbents in our field achieve more if we had a "better culture"?Given that each economist has only 24 hours in a day and is competing for scarce resources such as slots at universities, great students, grants, journal pages, attention from the media, attention from our spouses, friends and children and parents, what should be our "rules of engagement"?I remember reading Dubner of Freakonomics saying that economics is "cut throat".   While we celebrate perfect competition in Econ 101, do we engage in perfect competition (pun intended)?  Have you met economists who are charming in public but talk behind the back of colleagues?  Of course.  The anonymous web has simply taken those past private conversations and made them public so that everybody is next to the watercooler as the big talker talks.  Perhaps the Web has also created a "learning effect" as others learn the dark art of bad mouthing other people.In a "rat race", how much of one's progress is due to rising by merit vs. tearing down others?In the TV Show the West Wing, a perfect President (who had a Nobel Prize in Economics!) led a organized respectful team.  Most economics departments do not have this same feel.  Younger faculty face tension over the tenure process. The senior faculty must choose whether to stay in the game or devote more time to consulting and leisure.  Graduate students must choose who to work with and what problems to work on. At USC Economics,  we are thinking about what are a set of "rules of the game" so that PHD students, junior faculty and senior faculty all learn from showing up to the department.   Mutual respect is a  "two way street".  Tom Sargent said that we are all students but differ with respect to our vintages. The challenge in economics is "directed search".  If a senior faculty member believes that he is unlikely to learn from interacting with a PHD student from a LRM (ha!) then he will focus his attention on the HRM PHD student.    Given our finite time, this search strategy may be "individually rational" but it begins to create monopoly power that is re-enforced as that HRM PHD student takes a job at a MRM Assistant Professor job and is named to the NBER.  Small differences in initial conditions do matter in a world of finite time and attention.  If we add to this sexism and racism then this exacerbates the challenge.I HAVE[...]

A Structural Discrete Choice Model of Amazon's HQ Decision: A Blog Post (not an Econometrica!)


Dating at least back to Dennis Carlton's 1983 RESTAT paper,   economists have written down an indirect profit equation that measures a given firm's profit if it locates in a given geographic area such as Chicago or Nashville.  Suppose there are 87 of these different locations.  A profit maximizing firm will estimate its profit if it opens its headquarters in each of these locations and then choose the location based on the maximum value across these 87 numbers. Why would a decision maker such as Amazon earn different profit if it builds a headquarters in different locations?1. the rent it pays per square foot will vary across locations.2. the tax breaks it receives will vary across locations3.  the human capital it can hire will require different "combat pay" in different locations.  In a beautiful city, Amazon can lure and retain talent at a lower wage than if it chooses to locate its headquarters in a humid, dangerous place. 4.  If Amazon is energy intensive or water intensive in producing output, it will think through what its operating costs will be from being headquartered at each  location.5. If the executives have families, the executives will think about what city specific schools their kids will attend, what city specific jobs and activities their spouses will participate in (the co-location problem), they will think about what city specific restaurants and country clubs they will participate in (the consumer city).  The executives will care about climate and quality of life because leisure time will mainly be consumed in the hq city.   Bottom line, in a nicer city --- Amazon can pay less and retain and recruit talent.  The area's attributes are part of the total compensation package.  Sherwin Rosen taught me this 30 years and this is the heart of my quality of life research (see this and this).If the firm expects to spend at least 30 years at this location, it must not only collect information on #1 to #5 today but also form an expectation of each of these attributes over the next 30 years.  The econometrician studying this firm must form a model of the firm's expectations of how these atributes will evolve over time. If the econometrician is lazy and assumes that the firm believes that cities never change then the econometrician will mis-specify what information the decision maker actually used.  This is why the rational expectations approach became so popular because it provided an intellectual justification for the "symmetry" between the decision maker and the researcher studying the decision maker.  For example, if Amazon believes that climate change will make Nashville 120 degrees in summer by the year 2023 but the econometrician assumes that Nashville's average temperature each summer never changes, the econometrician will over-estimate the probability that Amazon chooses to place its HQ in Nashville.This brief sketch highlights the challenge for an econometrician who seeks to quantify the relative importance of these 5 factors in determining a billion dollar firm's choice of place.Now, if the econometrician has the data on what is each firm's set of "finalist"locations (i.e chicago, Nashville), and observes which location each firm chooses for its new HQ and if the econometrician observes a vector of city attributes (see #1 to #5 above), the researcher can estimate a MacFadden conditional discrete choice model to recover estimates of the marginal coefficients on attributes #1 to #5.  This is a revealed preference app[...]

The Amazon HQ City Decision and Lessons for Urban Adaptation to Climate Change


Amazon will soon choose a new location for building its 2nd headquarters.  Chicago may be chosen.  The winning city will receive an influx of high paying jobs and this will boost housing prices, human capital, restaurant demand and tax revenues.  Cities are competing by offering tax breaks.  Will Winner's Curse arise as cities over-pay?

Now let me turn to climate change adaptation.  Critics of my free market adaptation work sometimes argue that a large percentage of the population have the wrong beliefs such that these climate deniers under-estimate the risks that a geographic area such as Miami will face in the future.    I do not deny that there are climate deniers. In recent work, I have studied how their existence affects induced innovation.

But, these critics ignore general equilibrium effects.  I believe that both major employers such as Amazon and the insurance industry are the "adults in the room".  Amazon will not open a new durable and expensive headquarters in a location that climate change will destroy.   Such firms will be more likely to choose a location with good fundamentals and where the urban leaders are upgrading the infrastructure to protect it from future threats.  A mayor who is a climate denier but seeks to attract major employers will cater to such employers because the mayor needs a major employment center.  People follow jobs!    So, even in an economy featuring "deniers" and political leaders who are "deniers", a mayor who wants to attract new high paying jobs to her city has an incentive to invest in risk mitigation.  This topic has not been explored by professional economists.  

For more on my ideas about the future of insurance in protecting us from climate change, read my recent HBR piece.  

A Few Thoughts About a Paul Krugman Urban Economics Tweet


Dr Krugman tweeted this.   I am not smart enough to completely see his thoughts embodied in these 140 characters but I am going to try because this raises a fundamental issue in urban economics.  Below, I reproduce his cross-U.S city graph of log population density as a function of log population. I believe that Dr. K wants you to see that "smart growth" progressive cities are above the regression line while sprawling cities such as Houston, Dallas and Atlanta are below the regression line.  So what?A city such as SF (San Fran) has a higher population density than its population would on average predict that it should.  Such a city is "economizing" on land as people live in multifamily housing rather than sprawl.But, Dr. K is ignoring prices.  The reason why people live at higher density in SF , LA and NYC is that land per acre is so expensive.  When you live in a high rise , you are sharing space with others and economizing on this scarce asset.   Where land is cheaper in Atlanta, Dallas and Houston, people consume more of it.Now, let me say something smarter.  A good economist would ask, is Atlanta land cheap because of supply or demand?  In English, is Atlanta undesirable and thus demand is low and this yields low land prices or is Atlanta land cheap because there are fewer zoning restrictions and this shifts out the supply curve or makes it more elastic?    How does Dr. K. plan to answer this?Second, suppose that in a place such as Houston one can buy a nice $500,000 home but one does have to face the Houston humidity and the rising risk of Hurricane Harvey risk.  Does this still yield greater expected utility than living in a studio with 4 other guys in NYC for the same rent?  What is the good life? What if we have different conceptions of the good life?  In a world where people differ (diversity) why can't we be free to choose?  We explore some of these themes  in the following papers available here and here.   If people have different risk aversion parameters then some may choose cheap, humid (and increasingly risky) Houston over more expensive smaller housing on higher ground.  Are they "free to choose" to make this choice?  Now I recognize that if they receive federal bailouts when disasters do occur that this encourages moral hazard effects and this is ugly and needs to be changed.Dr. Krugman's tweet raises deep issues regarding the gains to a household from living in its own single detached house (with its own land) versus sharing with strangers.  In a world of consumer sovereignty, economists can point out the social costs associated with owning a lot but we can't question where that core private benefit from seeking that lot comes from.  As I recall, when Dr. K taught at MIT -- -he had a very nice single family home close to Harvard (I lived in a multifamily building nearby). Let me end with a real PHD economics question.  Dr. Krugman has a clark medal and a nobel prize. I have neither.  A real home run paper in this paper will disentangle whether supply side restrictions on housing (i.e zoning) make an area more desirable (i.e shift out demand).  Think of Paris or NYC.  While Glaeser and Gyourko emphasize the costs of zoning (see the post above), what are the benefits of zoning?  In an age of climate change, would Houston be how much resilient of a city if it has zoning?  How much more expensive would [...]

The USC Undergraduate Economics Association Draws 100+


At 8pm on a weekday, I'm usually home with my family but last night I participated in our "opening day" of the USC Undergraduate Economics Association.    In my role as Department Chairman, I welcomed the students and encouraged them to use their economics training outside of the classroom and to apply their logic and quant skills to questions that they are passionate about.  I told them that the Nobel Laureate Roger Myerson will be giving an undergraduate lecture on September 14th and I told them that I"m in talks with Amazon's Chief Economist to give a lecture in the next couple of months.  The large audience who attended were quite interested.  I'm grateful that my colleagues Roger Moon and Mark Moore joined me to represent our faculty.

Economics is the largest major in USC Dornsife's college. I expect that our # of majors will grow by 10 to 20% by the time my Chairmanship ends.  Unbounded growth.   When I taught at Columbia 25 years ago, we did the same thing.


Everyone knows that I never give long talks.  I speak for 3 to 5 minutes and then I stop.  The real meat of the group meeting was as student panel discussion where 3 seniors who have been stars in our program explained their life goals and how economics at USC has helped them achieve their goals. They talked about internships, opportunities and life.  As an old guy, I found the event to be inspiring.  There was an optimistic feel to our meeting. Our students are proud to be econ majors. I encouraged the room to send me emails about we can improve the major and what outside of the classroom activities we should be offering.

This is USC.  We are more than football!!

Hurricane Harvey's Economic Damage


In a previous post, I wrote about Harvey and I have also done a radio interview about the local economics of disasters.    The key point to keep in mind here is the importance of protecting life in the face of a severe disaster.  The death rate (deaths per million people exposed) is really low and this is wonderful and basic economics predicts this.Look at the cover from today's NY Post.  $160 billion looks like a very big number.  This is the current estimate of the total cost caused by this disaster.But the number doesn't look so big when you remember that the US economy's GNP is 19 trillion dollars per year.Let's think this through.  Suppose that all of the $160 billion damage bill is due to destroyed homes. To keep this simple, suppose that every house in the affected Hurricane Harvey area was worth $200,000 the day before the disaster.  If $160 billion dollars of damage occurred, then 1.6 billion/200000 = 800000 homes were destroyed.If the home is worth $200,000 then a good prediction of its annual rental flow is .05*200000 = $10,000.  This is annual rental flow of income that the owners of the homes have lost because of the disaster. UPDATE,  I have corrected my algebra mistake and rewritten this.  So, under my assumptions and I have made up some assumptions above to make this more stark.  In an economy where GNP is $19 trillion each year;   800,000 asset owners have lost an annual flow of $10,000 for 70 years (the lifetime of a durable home).   NOW , note that I have assumed that each of these owners has a 0 mortgage.  If such individuals had a 75% LTV then they can default on their mortgage and walk away with a $50,000 loss in equity or an annual loss of $2,500.  In this case, the shareholders of the banks who made these loans will bear the incidence of the shock.Is this a shock to our macro economy?  It could be if this sets off a ripple effect through the banking sector.  But, I don't think this will happen. Instead,  this is an awful regional income effect.   The worst disaster in U.S history in terms of sheer water (11 trillion gallons) barely affects the national macroeconomy  because the United States consists of over 300 major cities. We are a spatially diversified portfolio of cities.   I am concerned that a decline in Houston prices could trigger a local mortgage default cycle (strategic default) and this could have broader consequences.  So, the distribution of LTV across home owners and the impact of the shock on home prices will play a key role in determining short term increases in mortgage default risk.Of course, given our current government programs --- the costs of cleaning this mess up will borne by the nation's tax payers through our safety net programs and our current spatial subsidies to affected regions.  But, there are 340 million people in this country.  If the unaffected 320 million people each paid an equal share of the $160 billion in damages, then each of us would face a one time fee of $500 each or an annual fee of $25 (assuming a 5% interest rate). Let me be clear, those who have suffered at ground zero have suffered greatly.  The question moving forward is how to rebuild Houston and who bears the incidence of this.  I believe that the Houston property owners should pay for their own defense since they gain directly through capitalizat[...]

Oklahoma Radio and Climate Change Adaptation


Perhaps I should move to Oklahoma?   I had a great talk with Trent England in this radio segment.   We spoke about urban quality of life and the free market's role in improving our quality of life during a time of increased climate risk.