Monday, May 23, 2011

Endogenous Technological Change and Aging Baby Boomers

As Baby Boomers age, their aggregate demand for products will create new markets for innovators.  Acemoglu and Linn (2004)  have anticipated future news stories such as this one.  I believe that the same dynamic will unfold in the case of climate change adaptation.  Billions of people will be seeking strategies to help them cope with climate change and the best ideas in the market will rise to the surface and deliver.  Which ones will they be? I'm not that smart but I understand the law of large numbers and the power of ideas as public goods.   To quote myself;

Urban Adaption to Climate Change

My book titled Climatopolis: How Our Cities Will Thrive in the Hotter Future was published in fall 2010. In it, I examine how urban quality of life will be affected by climate change. Assuming free market capitalist growth and the fundamental worldwide free rider problem, global greenhouse gas emissions will continue to rise. Facing this reality, what will climate change do to our urban economy?

Although I cannot predict what will happen to a city such as Moscow in the year 2050, I am confident that the insights generated by NBER research have direct implications for the complex challenge of climate change adaptation. Microeconomics provides a powerful tool for thinking about how we will cope with this emerging ambiguous threat. The book's core thesis is that urban capitalism will play a crucial role in helping us to adapt to the challenge posed by climate change.

For example, climate change is likely to raise the average temperature in certain cities. Because of that, cities such as Detroit and Buffalo will have an easier time competing against Sun Belt cities whose warm winter temperatures have acted as a magnet, attracting population migration.15

In Climatopolis, I argue that households will learn from climate scientists about the new challenges that different cities will face. If specific cities do experience a decline in their quality of life, then their real estate prices will decline, and they will suffer a net outflow of people. Households will "vote with their feet" and this nimbleness will help them to cope with the evolving challenge of climate change. Cities compete to attract and retain the skilled. If a city's quality of life declines because of climate change, then the skilled will leave and economic growth will slow.

My book emphasizes the potential for endogenous technological advance to play a key role in helping us to adapt. The billions of people who will be affected by climate change create a large market opportunity for entrepreneurs who can serve this market. In the presence of fixed costs to develop new products, the scale of the market is a key determinant. If billions of people seek an energy efficient air conditioner to offset hot summers, then there will be sharp incentives to invest in developing such products. Some of these producers will succeed. In a globalized world market, the pay-off to the successful entrepreneur will be huge. In new research, I will continue to explore microeconomic issues related to climate change mitigation and adaptation.