Saturday, March 30, 2013

How Are University Deans Evaluated?

Deans serve five year terms and often seek another 5 year term.  In this age of performance criteria, how are Deans evaluated?  Since they were originally chosen by the Provost, the Provost has a slight conflict of interest in determining whether the Dean has done a bad job during his/her 1st term.  Departments who are part of the Dean's Empire do not have the right incentives to tell the truth about the Dean's performance. If they anticipate that the Dean will be re-appointed and their remarks will become known to the Dean, then the Dean may seek revenge.   With faculty, external letters play a key role in determining evaluation but with Deans there is no role for such letters because all of the Dean's effort is unobserved by outsiders.  If the Deans are evaluated on money raised, then this raises the counter-factual of how much $ would another Dean have raised?  Are Deans at a university benchmarked relative to each other? But, how can the Dean of Social Sciences be compared to the Dean of the Medical School at the same University?

So, what is the "efficient way" to evaluate a Dean's performance? If we are unable to design such a performance metric and do not promote Deans based on this metric then what does this mean about the future of our universities?   You might say that the same issue arises with respect to managers of Fortune 500 firms but is this true? The external market for talent and poaching by other firms provides a market test of the quality of internal talent.  

With faculty members, we are one person firms and there is a clear link between our reputation and our teaching and research work which can all be quantified using various metrics. Deans engage in Team Production. If the Law School makes great strides during Dean X's reign, how much credit does the Dean receive and deserve?  Did the previous Dean make the hires and these people reached their peak production during Dean X's reign?  Did the economy boom when Dean X was in charge and the donations flowed in?  Note that this point is similar to the CEO pay for luck literature.

My big question here is how does a non-profit organization know when it does and when it doesn't have excellent leadership and what incentives are in place to encourage such efficient sorting?

Friday, March 29, 2013

Time Consistency and Reneging on Promises for Timely Information

For everyone who teaches undergraduate economics and seeks fresh examples for teaching the time consistency problem, the New York Times serves up a beauty.  

High Speed Rail's Implications for California Real Estate

Read this NY Times article about California's High Speed Rail.  The following quote I reproduce below highlights a similar theme as my recent PNAS China Bullet Train paper.

National reporting on the new high-speed railroad (HSRR) encapsulates the strange delusions outsiders have of California. HSRR has been hyped as a fight between profligate Liberal Train-Huggers out to save the environment vs. Money-Savvy Conservatives out to save the budget. In reality, in a different political climate, the partisans should be on exact opposite sides because HSRR is NOT about saving the environment nor busting the state budget. HSRR is about the one true obsession of California: Real Estate. It is well known that California has ridiculously high housing prices. What is never mentioned is the real reason for this state of affairs: geography. CA real estate development is not constrained by liberals (lots of them are real estate agents) but by the geographic realities of California. Flat buildable land not in a remote desert away from job centers is at a premium. There is, however, one HUGE reserve of such land: the San Joaquin Valley. The primary result of building HSRR from LA to SFO will be to open that vast reserve to real estate development. The promise of HSRR is not that you can go from LA to SFO in 2 hours and 40 minutes, but that you can live in a reasonably priced house somewhere between the two and get to work in an hour or an hour and one half without fighting traffic. California may have its strange delusions but, as currently framed, the national dialogue about what HSRR means to California is much stranger, much more delusional.

Summer School at UCLA in 2013

I'm not sure why I keep volunteering to do this but I'm teaching undergraduate environmental economics at UCLA in the summer of 2013.  This is your chance (and may be your last chance for a long time) to take this exciting course.

Newport Beach and the Ring of Fire

If I might quote, Johnny Cash; "I went down to a Ring of Fire ..."   --- I won't sing for you but I do want to highlight this piece in the LA Times about the social interactions between the 1% and the 99% at the beach.  Here is a juicy quote from the comments section:

"HiVeloCT at 4:24 AM March 29, 2013
I've lived in Orange County since the early 60's and the privileged few who can afford oceanfront property have ALWAYS tried to run off those they consider to be "riff raff".  I have no doubt that those trying to get rid of these firepits light up their fireplaces, BBQ grills and similar sources of "particulate" pollution on a regular basis without any regard for the air quality."

So, this is a classic case of rich coastal home owners trying to privatize the beach and get rid of the middle class folks who like to hang out at the beach at night and gather around the fire pits.  For those of you who do not live close to the Ocean (I live 6 miles from the Pacific), the photo below will show you what this is about.

Corona del Mar State Beach

The nearby home owners worry about particulate matter being created and they may be right but nobody has bothered to monitor this.  The pit dwellers claim that this concern is just a "smoke screen" (pun intended) to use a politically correct means (environmental protection) to get the "unwashed" off the beach.  This general theme interests me because it speaks to the issue of certain interest groups using environmental protection as a means to achieve ulterior goals (income stratification) or at least to achieve two goals at once (clean air and class separation).  The comment I quoted above suggests that there is a backlash against this attempt and the author of the LA Times article clearly sides with the 99% on this issue.

Thursday, March 28, 2013

An Interesting Hypothesis Emerges from Yale Law School

In this age of non-stop talk about the 1% and the 99%, are the 99% "out of the loop" when they attend Ivy League Schools?  In that past, this question might have focused on not being invited to the cool parties but a group of students at Yale Law School argue that students from lower-income backgrounds are out of the professional loop at YLS and this is diminishing their chances to be big stars as practicing lawyers or future law professors.

Undergraduates whose parents went to college are more likely to know how to "play the game" in terms of non-cognitive skills such as appearance, attitude and doing the little things to raise the probability of success in applying for jobs.  This Simpsons clip will explain what I mean.  This "Young JFK" is classy.  At the modern university, whose job is it to provide such "polish"?  The faculty certainly aren't providing these skills.   Should we be?

Wednesday, March 27, 2013

Winners and Losers from Hurricane Sandy

This article  documents that people seeking a coastal summer vacation along the Atlantic Ocean are substituting away from the New Jersey Shore because so many of the NJ communities have been badly injured by Hurricane Sandy.  These communities will lose tourist $ because of the shock but the tourists' dollars do not end up in a Cyprus bank account. Instead, there are other substitute locations for the tourists to visit instead.

"In nearby Sea Isle City, whose Chamber of Commerce leased the billboard outside the Lincoln Tunnel, a spike in rentals suggests they have succeeded in poaching some vacationers from the New York City area. “We’re going to have a very good summer as a result,” said Christopher Glancey, the chamber president and a real estate broker."
Note how competition protects the households seeking a tourist summer at the beach and this competition provides strong incentives for damaged beach communities to rebuild in smarter ways so that they are more resilient against the next Hurricane.  Note that this is about making $.  This isn't about "saving the whales".  If coastal towns want to survive in this age of climate change, they have strong incentives to be smarter about their design and architecture.  This is the small ball of adaptation at work!

Tuesday, March 26, 2013

Some Biographical Information

From age 2 to age 7, I lived here in Manhattan in apartment #4c.

Why Do Most of NYU's Faculty Oppose Their President's Growth Plan?

Today, there are some punchy letters in the NY Times.  This lively section tends to suffer from a fundamental selection issue that some anonymous editor chooses which letters to publish and he/she tends to choose letters that selectively affirm his/her world view.  I would prefer a "crowd source" approach where "the people" vote and the most popular ones are published.

As a tenured academic and as the spouse of a tenured academic, and as the son in-law of an emeritus tenured academic, and as the son of a tenured academic at NYU, and as the father of a future tenured academic, I like this letter;

To the Editor:
As an N.Y.U. graduate (twice, B.A. and J.D.), I offer this deconstruction of Prof. Jeff Goodwin’s essay:
A subset of N.Y.U.’s faculty members — who have lifetime tenure; live in below-market-rent apartments subsidized by the university; send their children to N.Y.U. for free; have summers off; take periodic sabbaticals in which they don’t teach; and no accountability for the success or failure of a worldwide enterprise — is upset that the university’s president, John Sexton, earns more than they do and hasn’t consulted them enough as he’s transformed the university into an intellectual powerhouse and a globally recognized brand. To shame him into meeting their demands, they’ve had a very public temper tantrum.
Unlike the faculty of arts and science, I am grateful to Dr. Sexton for improving my alma mater — and, not incidentally, significantly raising the value of my degrees.
New York, March 21, 2013

What do faculty want from our Leaders?   We want them to raise money and invest in excellence rather than carving out their own niches and declaring that during their glorious reign that they created this building and that department.  
In speaking to some excellent NYU faculty concerning their opposition to the Sexton Towers, I have heard two broad complains.  The first is one launched by guys in their mid 50s who say that they will bear the costs of construction but will gain none of the benefits which will be enjoyed after they retire in the 2030s.   The second is the concern that President Sexton is engaging in "Empire Building" and that this costly effort could damage NYU's long run balance sheet as the University could be saddled with some very costly useless assets.
My answers?  To the middle aged academics with a short run horizon, this is a dangerous group because they do not have long run stakes in the company.  A private company would grant these guys stock options to incentivize them to have a long run perspective.    To those concerned about "Empire Building", the key here is "specificity".   NYU needs to build buildings that can be converted into non-academic uses so that they can be sold to some future  Don Trump as residential housing.  This creates an option value for the building so that it doesn't turn into the next Empire State Building or Chrysler Building.    The key unknown issue for President Sexton is one of "limits to growth".  How much has NYU's lack of interior space limited its growth? If the Campus expands in terms of vertical square footage, why will this allow it to rise past Columbia?  How do feet of real estate affect academic excellence? In this age of the Internet and distance learning, why is NYU's demand for space rising?   Is the faculty growing? Are labs getting bigger? Are more students living on campus? A real estate demand model needs to be estimated and a serious study of the causal relationship between interior space  and University excellence must be conducted.   

Monday, March 25, 2013

The Demand for Center City Commercial Real Estate

Nasty Gal has moved to Center City Los Angeles.  Why?

"Ms. Amoruso moved Nasty Gal to Los Angeles in 2011, to be closer to her merchants and models. She shunned office space in Santa Monica, where ShoeDazzle and BeachMint are based, for less glamorous space downtown, where 20-something Nasty Gal employees in mesh crop tops, leggings and platform shoes stand out from the paralegals. (Shortly after the move, one employee was berated by a lawyer in the building who saw “Nasty Gal Creative Studio” and assumed it was a pornography studio.)"

This blog post is 1/2 a joke and it is 1/2 a statement about the future of Center City real estate demand. Who needs to be downtown?  Who can visit infrequently by bullet train?

Sunday, March 24, 2013

The Hamptons' Real Estate Market Adapts to Climate Change

The NY Times reports that coastal summer homes' elevation is capitalized into rental prices.   Perceived quality is reflected in prices.  Surprised?  I'm not.    Here is a quote:

" Waterfront properties,” she continued, “are always sought-after, but it’s probably safe to say that waterfront with elevation is becoming more important. Maybe that’s the new value that’s priceless.”
Note the business opportunity.  Those engineers and architects that can provide lower flood risk designs will be able to collect a large price premium.  Are you such a pessimist that you believe that nobody will figure out the magic of what Venice and the Dutch have figured out?  This is the small ball Climatopolis logic.

This Hamptons example is a nice case study of my Climatopolis logic.  Here are the steps for how capitalism protects us from climate change;

Step #1:  New information about new risks such as flooding is revealed (i.e Hurricane Sandy)
Step #2;  People update their subjective probability assessments
Step #3;   prices for risky assets decline and prices for safe assets (i.e homes less likely to flood) increase
Step #4;   product suppliers notice this new price gradient and this influences innovation investments and R&D patterns
Step #5;  some of these innovation efforts fail and some succeed
Step #6;   consumers now have a greater menu of adaptation products to choose from (i.e floating homes) because of Step #5
Step #7 overall adaptation is aided by Step #1 to Step #6 playing out

Note that this is dynamic capitalism at work.  Government can play a productive role in step #1 but it is the free market (not Government) leading the defense and it is the invisible hand playing the key co-ordinating role.

Saturday, March 23, 2013

The Challenge of Living in West LA

It is 70 degrees this morning. I'm listening to Neil Young's Greatest Hits while I type outside.   A bird just pooped and it landed on my computer screen.  Who can I sue?

Iceland in the Year 2050

The NY Times reports a type of James Bond story as a mysterious Chinese zillionaire seeks to purchase a large amount of rural Iceland to erect a snowy golf course.   Do you smell Dr. No?  I don't.  I see a climate change adaptation bet.   Arbitrage is to buy low and sell high.  Perhaps because he read Climatopolis, Huang Nubo is making an investment that could earn a high return if Iceland's quality of life improves relative to the rest of the world as climate change plays out.    New challenges create new opportunities.  While the NY Times views this story as just "weird", I think it is a nice example of how those who form expectations of the future act upon those expectations.  Mr. Nubo could lose on this investment but he is experimenting and there are plausible scenarios under which he will become even richer.  

It is certainly possible that his "golf course" is an attempt by China to claim property rights to minerals that might be under the ground but any land owner always has this option.  I ask my students to solve for a price of gasoline such that Beverly Hills home owners would knock down their homes and drill for gas underneath the surface.  

Tuesday, March 19, 2013

E-Waste and International Gains to Trade in Used Durables

The New York Times has a piece focused on warehouses filled with old computers and televisions.  The interesting economics here relates to product cycles. In the old days before "flat screen TVs and Computers", this e-waste could be profitably recycled into new televisions and computers that would be sold to households.  Now that households don't want the old versions of these products the demand for these defunct materials is low and they now sit in inventory in these toxic warehouses.  The NY Times is worried that a new type of Superfund site could be created as the owners of this now worthless asset may walk away or illegally dump this stuff.   Given that these defunct machines have lead and mercury and other chemicals in them, their improper disposal could cause serious social costs.

International trade in used durables offers a solution here. Lucas Davis and I studied international trade in used cars in this piece.    I am not proposing the usual "pollution havens" trade that we send our toxic waste and $ to some unsuspecting developing country.  I am proposing that if we sent our e-waste to a developing country that enterprising entrepreneurs there could figure out how to repair these things and this would allow the middle class in these countries to have access to cheaper computers and televisions.

A Chicago economist might ask; "If your international trade idea is so profitable, why is there waste in the California warehouse?"   A lazy answer is that there are transportation costs and transaction costs for getting this business up and going.   If warehouses had to pay a "holding cost" for allowing inventories of e-waste to just sit around then this would incentivize them to find a trading partner to take the waste and convert it back into being a usable consumer product.

Monday, March 18, 2013

China's Bullet Trains and Mega City Quality of Life

PNAS has just published my China bullet trains paper.  This work is joint with Tsinghua's Siqi Zheng.  Below, I reproduce our abstract:

"Megacity growth in the developing world is fueled by a desire to
access their large local labor markets. Growing megacities suffer
from high levels of traffic congestion and pollution, which degrade local quality of life. Transportation technology that allows individuals to access the megacity without living within its
boundaries offers potentially large social benefits, because individuals can enjoy the benefits of urban agglomeration while not paying megacity real estate rents and suffering from the city’s
social costs. This paper presents evidence supporting the claim that China’s bullet trains are playing this role. The bullet train is regarded as one of the most significant technological breakthroughs in passenger transportation developed in the second half of the 20th century. Starting in 2007, China has introduced several new bullet trains that connect megacities such as Beijing, Shanghai, and Guangzhou with nearby cities. Through facilitating market integration, bullet trains will stimulate the development of
second- and third-tier cities. By offering households and firms a larger menu of location alternatives, bullet trains help to protect the quality of life of the growing urban population. We document that this transport innovation is associated with rising real estate prices in the nearby secondary cities."

Sunday, March 17, 2013

All of the Land and Structures in Los Angeles County is Valued at $1.1 Trillion!

Take a look at page 4 of this report and gawk at the $1.1 Trillion dollar number. In 1990, the Los Angeles County Assessor's Office valued the land and structure at $430 billion.  Converting these numbers into real dollars using the CPI,  yields an annual average real appreciation rate of 2.5%. I realize that LA County now has a larger quantity of buildings than it had in 1990 but this example highlights that the land has value out here because the building themselves are mostly nasty 1950s tear downs.  

Saturday, March 16, 2013

When Does Price Not Signal Quality?

By a no arbitrage argument, high prices reflect high quality.  If an apartment's rent is high but its structure quality and location is bad, why would anyone pay that?  In this case, rent would fall.  If an apartment's rent is low but its quality is high,  multiple bidders would show up and the free market price would be bid up to reflect its quality.

I raise these issues because a UCLA colleague of mine challenges me that a location's quality of life cannot be inferred by its rent.   I want to explore this claim in this post.

If there is rent control, then he is correct.  But, if free markets are allowed to operate does price signal quality?  If a person chooses to live in A rather than B then her willingness to pay for community's A's attributes relative to community B must be greater than or equal to the rental premium for living in A over B.  In this sense, data on the rent differentials across areas  and data on where people choose to live places bounds on a person's willingness to pay for non-market goods. This was a key point in Sherwin Rosen's hedonic work.

Economists understand that there are "infra-marginal" people.  Suppose that your Aunt lives in Santa Monica.  You will not be charged a higher price for rent in Santa Monica because of this.  This is an idiosyncratic feature of Santa Monica that will keep you there even if there is an increase in crime in your local area.     In contrast, a "marginal person" is equally happy living in any neighborhood given current rental prices. Rental prices have adjusted so that there are no possible gains from moving.  This means that rents perfectly signal quality for the "marginal group".

Consider an apartment owner who currently rents to Betty for $900 per month.  She gains $950 worth of happiness living in Santa Monica because she loves the unique coastal climate (and the statisticians can measure this) and is willing to pay $900 for this and she loves being close to her Aunt and would be willing to pay $50 for this access.

Suppose that Matt is willing to pay $X for the apartment.   What will be the equilibrium?  Note that in the example below, the statistician only observes what rents people pay, she doesn't know their willingness to pay.

If X < 900, then Betty rents the apartment and the statistician never can recover that Betty values being close to her Aunt.  The rent remains at $900 a month.

If  900< X<950 -="" 900="" a="" access="" and="" apartment="" as="" aunt="" because="" betty="" bid="" bound="" city="" did="" didn="" features="" for="" have="" he="" her="" i.e="" idiosyncratic="" in="" increase="X" increases.="" is="" it="" keep="" knows="" lower="" makes="" match="" matt="" monica="" move="" must="" nbsp="" not="" now="" of="" on="" other="" p="" pay="" reasons="" remain="" rent="" rents="" rise="" s="" santa="" sees="" she="" some="" statistician="" t="" that="" the="" then="" to="" whose="" will="" willingness="">
If  X > 950,  then Matt gets the apartment and the statistician knows that an upper bound on Betty's willingness to pay for the idiosyncratic features =  X-900 because Betty refused to match Matt's offer.

This example shows how economists use market data to learn about "unobservables".   Prices directly signal quality and prices and observed choices (does Betty keep the apartment) can be used to recover what must be the value of idiosyncratic neighborhood attribute.s


UCLA's Chancellor on the "Double Bottom Line"

All academic economists should read UCLA's Gene Block's recent editorial.  Below, I provide some quotes from his piece and my thoughts.    Chancellor Block appears to reject some of Milton Friedman's logic on the benefits of ruthless pursuit of self interest.  Dr. Block's piece raises key issues including;  where do our preferences come from? Do market prices signal where scarce resources (i.e talented undergraduates) should be allocated? and How do we evaluate the effectiveness of universities?

Given that a national debate is now taking place concerning the role of universities in civic life and what is a fair price for attending such schools, Chancellor Block's piece provides an excellent opportunity to debate some key issues that our society must confront.  There is great wisdom in his piece and I have often thought about the themes it touches on.

1. Is Greed Bad?  Gene Block on volunteering at UCLA.
"It's a backlash, perhaps, to the 1980s individualist mantra that "greed is good." The dramatic Wall Street downturn five years ago was also a stern warning to graduates that such a mantra cannot be sustained."
I love the UCLA boosterism here but I'm not sure that too many young people are going to Wall Street.  Don't forget the The Separation Theorem.  Gene Block appears to reject this theorem.  This theorem states that in choosing your financial portfolio, you choose what companies to invest in to maximize your expected risk adjusted rate of return.  Once you have earned this income, you can spend it on anything you please.  Think of Bill Gates. He was a ruthless monopolist at Microsoft and made a fortune and now wants to save the world.  Economists have argued that it is wise to ruthlessly pursue expected income maximization and then to devote your resources through charity to those causes you want to pursue.

Perhaps Dr. Block is voicing a theory of endogenous preferences that young people's priorities can change due to the experiences they have.  If a person goes to Wall Street, do they become  a "ruthless Republican Romneyite"?  If this same person had gone to Berkeley to volunteer, would this person evolve into being a very different person who "better serves society"?  Economists do not believe that our preferences are so shaped by experience.  This is a testable hypothesis and I would be happy to write a paper with the Chancellor on this topic.

2.  Does society need more altruists?
"The world works best when people remember that we're all in this together. While it is hard to correlate the benefits of a college education to societal well-being, never in my 35 years in higher education have I seen a more pronounced and sustained effort by young people to choose careers that serve society."
Economists have been teaching the free rider problem for decades.  Should this "evil idea" be banned from our curriculum because it encourages cynicism?

Is the Chancellor's fact that more young people are choosing careers in public service due to supply or demand?  Is the Chancellor saying that it is a good thing that the private sector isn't hiring right now because this encourages more people to seek out jobs that better serve society?

Many economists including myself have worked on compensating differentials.  This is the simple idea that dates back to Adam Smith that many people sacrifice income for psychic benefits a different job may offer.   Many people do not choose the occupation that maximizes their PDV of income because there are other features of jobs that people value.  An economist may turn down a Wall Street job because of a love of conducting research and mentoring young students.  Chancellor Block celebrates volunteering and jobs that may not pay well in the short run.

The rugged pursuit of self interest has made the U.S the world's greatest nation.  Mark Zuckerberg produces social benefits and pleasure for billions when he narrowly pursues his goals.  Volunteer work should be celebrated but the private sector must continue to attract our best and brightest.

In my environmental economics class, I argue that we can solve most environmental externality challenges even if individuals solely focus on their narrow bottom line (i.e profits and income).  The key is getting incentives right.

3.  Measurement Error and bad data makes it challenging to calculate a University's PDV of future earnings
"Such data can be highly misleading. A graduate's income in the first few years after college is a poor barometer of earnings potential later in life. Students might join the military, Teach for America or the Peace Corps and then go on to higher salaries in their 30s or 40s."
Joe Tracy and Joel Waldfogel addressed this issue a long time ago when they ranked MBA programs.

4.  Was Hayek Wrong?

Economists have taught generations of students that the capitalist price system directs scarce resources to their highest use.  If being a dentist offers an annual income of $400,000 while being a urologist offers an annual income of $265,000 then the price system is nudging young people to become a dentist.  This is a "scarcer" field that requires more entrants.  This quote below suggests that my Chancellor disagrees.

"Universities, particularly those supported with public funds, exist to serve society. Asking students to choose a future based on a salary scale does not serve society and, often, does not serve the individual. Students need freedom and encouragement to find their passions and strengths. Framing decisions about college as a cost-benefit analysis will not encourage the creativity and risk-taking that has made this nation great."

5.   Universities as bundles of investment, consumption, and exploration

The Chancellor is 100% correct on this point.  There is no unique correct path for every student.  The modern university must be flexible enough to direct different students along different paths.  At UCLA, I see many students studying (investment),  and having fun (consumption).    Chancellor Block must be worried that there is a tradeoff that if students narrowly pursue fields with the highest financial rate of return that they will be later be bored by their irreversible choice.  The key to solving this potential problem is to encourage students to experiment and try different activities so they can learn about their talents and interests and find a good employer to match with.

Friday, March 15, 2013

An Update on Predicting Facebook's Future Revenue Stream

As my loyal readers know,  back in May 2012 I argued that purchasing Facebook at a price of $40 was nuts.   I now have new information to provide on the future of this innovative company.  While I infrequently log in to Facebook, below I reproduce the advertisements that were customized for me.

Do you see any patterns for how Facebook is profiling me?    Did I click on any of these ads?

Wednesday, March 13, 2013

Hard Work at Public Universities

I just gave my last lecture for the Winter 2013 quarter at UCLA.  There were 100 students registered for my undergraduate environmental economics class.  You can look at all of the class material here.    UCLA did not assign a graduate Teaching Assistant for this class. Instead, I hired a very talented undergraduate to work with me on the course but she didn't do any grading for the class.  By the end of this class, I will have graded one midterm, one final exam, five homeworks and one 600 word paper for each student.  The course was supposed to have a 70 person cap but being a sucker, I signed in an extra 30 students.  There were some excellent students in my class but these classes are too big.  I would like to teach smaller classes.  The solution to this challenge of enrollment in upper division courses is that my University must raise its endowment.   When I taught at Harvard in 1997, I had an excellent Teaching Assistant in a class with just six students!

Switching subjects, I want to talk about dead pigs floating into Shanghai.  While I don't know all of the details, this is a nice example of the Tragedy of the Commons and the Law of Unintended Consequences and the connection between agricultural regulation and city quality of life.   How could there be over 6000 dead pigs in the Huangpu River?

"The surge in the dumping of dead pigs, believed to be from farms upriver in Zhejiang Province, followed police campaigns to curb the illicit trade of pork products harvested from diseased pigs."

So, as the rural police addressed the nasty pork problem (and its threat to the food supply's quality), the owners of the dead pigs disposed of the bodies in a Mafia Style by dumping them in the river and they flowed down to the mega city causing challenges there. Since the river is public property, this was a rational (but socially inefficient) solution for the farm owners.

Sunday, March 10, 2013

A Few Comments on the IIED's "Assessing the Costs of Adaptation to Climate Change"

Given my ongoing interest in climate change adaptation, I sat down and skimmed this  this 2009 report on the cost of climate change adaptation.   This 116 page report uses the word "incentives" just once and never mentions the words "technological progress".   This strange report engages in a "top down" central planning exercise counting how many billions of dollars will be needed to be spent to achieve climate adaptation.

Here is a sense of the "top-down" exercise:


  • Water supply. The water estimate (Kirshen, 2007) considers the effect of additional water demand and changes on the supply side. Investment decisions are made in anticipation of 2050 water needs.
  • Human health. The health estimates (Ebi, 2007) are the extra prevention costs for three health issues: malnutrition, malaria and diarrhoea. The health impacts are based on the Global Burden of Disease study (McMichael et al., 2004).
  •  Coastal zones. Coastal protection costs are based on the DIVA model (Nicholls, 2007), which considers a limited set of adaptation options that are applied globally. Uniquely, the coastal estimate considers both adaptation costs and residual damages. For long-life defence infrastructure, investments are made in anticipation of sea-level rise in 2080.
  • Infrastructure. The infrastructure estimate adopts the World Bank (2006) methodology, using insurance data to determine the share of climate-sensitive investment, and applying a percentage increase on current infrastructural investment to suggest additional costs for climate-proofing new infrastructure. (However, the background paper by Satterthwaite (2007) took a different approach.)
  •  Ecosystems. An indication of adaptation costs for ecosystems was derived from the costs of increasing protected areas to at least 10% of the land area of each nation or ecosystem, although it was not possible to split this into baseline costs of meeting current deficits and incremental adaptation. See Berry (2007).
The five categories listed above are all important for our long run standard of living. Permit me to discuss each of the big five in order.

Water Supply  --- The rise of the smart meter will provide real time information to consumers about their own consumption.  Water utilities can use time of use pricing and this will induce conservation in the short run and long run. As water prices rise, innovators will have an incentive to devise new ways of augmenting our water supply and ways of recycling our water. The net effect of this better pricing will be that the IIED vastly over-states the necessary investment.  This organization also faces the challenging of disentangling the marginal extra investment in water infrastructure caused by climate change. In the developing world, nations are building water treatment systems because they are growing richer and their population is urbanizing. This is response to the need to urbanize (which is a climate change adaptation strategy).

Human Health --- As the developing world grows richer, the three health issues listed above will continue to decline as a threat. Clean water, access to better food and health care will help to reduce the death rate from these diseases.  Economic development and free trade reduce these threats and reduce the likely billions that the IIED claims will need to be spent on these serious challenges.

Coastal Zones and Infrastructure --- As shown by Hurricane Sandy, cities can be resilient in the face of terrible storms if the area has a robust economy.  The IIED does not discuss how economic development reduces the costs posed by  natural disasters.  We are also always rebuilding our cities as depreciation takes place. How does the IIED  distinguish between investment that is required because of standard depreciation (i.e old buildings falling down and repairs for roads) versus accelerated depreciation caused by climate change?   If climate change causes damage to a coastal area, is there a "silver lining" that the new infrastructure (while costly) will reduce the damage caused by the next natural disaster because of improvements in engineering techniques.   The 116 page piece never discusses new knowledge and new ideas and innovation reducing the price of adapting to the new challenges that climate change will pose. 

Ecosystems:  Here is a direct quote from the report:

"The study closest to identifying actual adaptation costs is for the Netherlands, where it has been
estimated that €1 billion are spent on nature conservation, with €285 million for managing
national parks and reserves and €280 million for new reserve networks and habitat improvement.
This action was aimed at reducing the threat from habitat fragmentation and other sources.
The planned national reserve network will reduce the vulnerability of ecosystems and species to
climate change and thus a (significant) proportion of the above costs could be considered as
climate change adaptation costs." (see page 97)

Note the strange double counting here.  Does Holland only invest in its national parks and nature conservation to adapt to climate change?  Such investments offer a stream of benefits such as beauty and leisure opportunities.  To attribute all of these accounting expenditures to "climate change adaptation" is to engage in accounting tricks.  A good economist would estimate what is the extra expenditure that Holland will engage in to protect ecosystems because of climate change. This would be the estimate of the marginal cost of climate change adaptation.

My Summary

This strange "macro" report never discusses any Micro issues of how rational firms, households and governments will respond to new challenges induced by climate change.  Ultimately, climate change is a micro-behavioral issue.   What incentives would induce self interested households, firms and governments to take actions to reduce their exposure to climate change risk?  If households move away from areas they understand are risky, if firms produce new solutions to help households to adopt, if governments adopt new rules to protect their citizens and invest in public goods and reduce international trade restrictions, how much climate change risk can be avoided at low price?  The report doesn't bother to discuss any of these issues.

Now, I must admit to one issue here.  One of the authors of this report, David Satterthwaite, wrote a tough review of Climatopolis.   If this is the best work he can do on this important topic, then he needs to retrain and take some Ph.D. Econ classes at LSE.   We are both graduates from that great school but I think we studied different subjects while there.

Here was my 2010 response to Dr. Satterthwaite.   Read the short version of Climatopolis!  Watch the videos and think about this issue.  Join the 99,000 who have watched my UCSB Lecture on this issue.

Green Space as a Strategy to Displace Sex Offenders From Your Neighborhood

Few communities seek to have registered sex offenders living nearby.  This NY Times article sketches out a "killing 2 birds with 1 stone approach".  Neighborhoods in LA are creating small public parks.  By law, sex offenders can't live within 2,000 feet of such a park.  So, a neighborhood that creates a park gains double benefits as a set of people can no longer live in the neighborhood and this is common knowledge.  

Economics can quantify how much the marginal member of this community (i.e the person just indifferent between living there or not) is willing to pay (WTP) for a new park using past real estate studies.   This marginal WTP can be quantified if you take hedonic estimates from the urban green space literature on the increment in home prices if the same home is located close to a park and you add in the Sex Offender discount quantified in this AER paper.  As a supporter of the rise of "green cities" and "green communities", I hadn't anticipated this bundled benefit.

Saturday, March 09, 2013

What is the Rate of Return When Deans Invest in Economics Departments?

As an economist who is married to an economist, I firmly believe that the wise Deans should invest more in academic economics.  But, this is an age of scarcity and there is an opportunity cost associated with investing in Economics Departments.   Given that we can't run a randomized field experiment where the Deans choose a department at random and give it $10 million dollars and then judge value added ten years later, how do we evaluate what is the rate of return on investments in Economics?

Washington Univ. in St. Louis offers a salient case study.  This important university has invested a large amount of $ in its Economics Department.  I have read about the Department's very nice new building.   It has hired some older faculty to sit in this new building.   Given this Department's "Big Push" starting in 2006, one could look at some outcome indicators such as output targets such as papers published in top 10 journals, or graduate students placed at top 50 universities.   How have the undergraduates benefited from a stronger Econ Department?  Have they become better problem solvers? Did they conduct their own original research? Are more of them entering top 20 Econ Ph.D. programs?  Are they increasingly likely to receive offers from Fortune 500 Companies?   So, this is an example where we can't calculate the rate of return on a large investment in a well known economics department.  There are objective criteria for determining excellence.  Which Departments are offering a high rate of return?

In this new age of accountability, will departments that offer a higher rate of return be rewarded by deans by receiving more resources?   Deans could substitute away from academic economists given that our wage per course taught is quite high.  What can we do to be more cost-effective?  Do academic demand curves slope down?

Friday, March 08, 2013

China's Mayor Now Have Incentives to Pursue Tangible Environmental Progress

 In joint research with several of my friends in China, I have released a new NBER Working Paper with the boring title; "Incentivizing China's Urban Mayors to Mitigate Pollution Externalities: The Role of the Central Government and Public Environmentalism".

Siqi ZhengMatthew E. KahnWeizeng SunDanglun Luo

NBER Working Paper No. 18872
Issued in March 2013
NBER Program(s):   EEE   PE   POL 

China’s extremely high levels of urban air, water and greenhouse gas emissions levels pose local and global environmental challenges. China’s urban leaders have substantial influence and discretion over the evolution of economic activity that generates such externalities. This paper examines the political economy of urban leaders’ incentives to tackle pollution issues. Based on a principal-agent framework, we present evidence consistent with the hypothesis that both the central government and the public are placing pressure on China’s urban leaders to mitigate externalities. Such “pro-green” incentives suggest that many of China’s cities could enjoy significant environmental progress in the near future.

Since I know that the readers of this blog prefer pictures to words, permit me to show you a single slide that tells the whole story.   For those who want more Laffont and Tirole in their lives, there is a double principal-agent issue here.  China's urban mayors are the agents who have private information about their pollution mitigation efforts. The two principals are the central government in Beijing and the urban public.  Our paper makes progress on investigating how reductions in information costs and the role of civil society play in mitigating this classic problem.

Thursday, March 07, 2013

Glamour at UCLA's Institute of the Environment

This was quite a fundraising  event for the UCLA Institute of the Environment.  It shows that UCLA may be able to raise $ in places not called Sacramento.  As I have said before, give free markets a chance!

The KPCC Radio Show on Climate Adaptation

In case you missed it, here is the video  from last night's KPCC discussion about adaptation to climate change.  I enjoyed my trip to Pasadena and made several new friends with folks in the audience.  As Basic Books prepares to release the paperback version of Climatopolis, I'm encouraged that serious talk about the microeconomics of adaptation has started to take place.   My 2010 book received a lot of negative press for the wrong reasons.  At that time, "adaptation" was a dirty work that was equated with defeatism.  Environmentalists didn't want to hear from a free market environmentalist.  After the 2012 Election, people have calmed down and are willing to have a spirited debate about new ideas for achieving the win-win of economic growth and adapting to the new threats that we have unleased.