Friday, November 06, 2009

Will LeBron James Move to the Knicks? A Test of Whether the Internet Substitutes for Big Cities

An open question in urban economics is whether information technology is a complement or substitute for living in a big city? Does the Internet and the fax machine increase or decrease the demand for living in New York City or Los Angeles? In a well known paper, Glaeser and Gaspar 1998 argue that it increases the demand for big city living.

So if Lebron James is a $ maximizer, will he move to New York City?

The NY Times says no. A famous agent says that 20 years ago it would have been a wise move to go from small Cleveland to big NYC. But now with the Internet 24 hour news feeds his fame will not be magnified in NYC. In fact, he will just be one of 100s of celebrities. If he has relative preferences and prefers to be the King of a Small Pond then Cleveland may offer him the same nominal salary, lower home prices and more fame!

The King should not forget Moretti's paper on real wage inequality that the high home prices in NYC will eat into his real pay. Cleveland's very low home prices offer some real consumption benefits.

A final point: the King's income = price per unit of skill*quantity of skill.

Unlike a software writer, a NBA player's skill is not augmented by being in a big city. There are no learning effects a la Jane Jacobs or Marshall. This article's point is that the Internet is creating a law of one price per unit of skill. In the past before the Internet, Skilled players earned more from Advertising and fame when the played in major cities because of the PR and fame amplication effect. But, the Internet can generate equal buzz regardless of where you play.

The King should talk to us urban economists! LeBron; call me.

The big question here is whether the King is a special case or whether this example foreshadows that the Big City premium will soon fade because of the Internet. In this case, the only reason to pay the big city real estate price premium is "Consumer City".