Tuesday, January 12, 2010

Tel Aviv's Boom and the Knife's Edge

Today, David Brooks celebrates Tel Aviv's success as an innovation hub. He tells an increasing returns story about a vibrant city. But, at the end of the article he hints that the "migration option" lurks and that the superstars in Tel Aviv could return to Silicon Valley (and Stanford) if life gets bad in Tel Aviv. He tells a "bank run" story hinting that terrorist attacks could set off a chain reaction that lead to an unravelling of the city --- the skilled leave.

Duke's Chris Timmins and Pat Bayer have done the best econometric work on this topic. This is an old draft of their work.

We all know the basics of discrete choice models (move to Tel Aviv or not). But suppose that rather than having exogenous attributes of Tel Aviv (i.e climate) as explanatory variables that people considering moving to Tel Aviv take into consideration whether other skilled people are moving there. So my probability of moving to Tel Aviv depends on the count of skilled people who are already there. In an IRS model, this variable should have a positive effect on my moving there. Now let a terrorist attack make households reconsider living there. In the Bayer/Timmins model; the initial "small" shock amplifies as the "bank run" begins --- as people leave Tel Aviv; this lowers my probability of wanting to live there and all of the skilled split.

To prevent this, you need some gravitational force such as patriotism or some Tel Aviv amenities that California cannot offer so that there is some baseline loss from leaving it.

Now from an irreversible investment perspective, if investors are aware that the golden goose may run away; does this retard certain capital investments in Tel Aviv?

I don't know.