Saturday, April 27, 2013


This PNAS piece presents evidence based on a 58,000 person sample that based on your trail of "Facebook Likes" that Big Data Nerds can quickly (and correctly) determine your sexual orientation, your race and your political orientation.   This suggests a certain "internal consistency" to the choices we make.  Dick Cheney apparently doesn't click on Prius Ads.    This evidence of "profiling" is good news for advertisers seeking to reach certain markets.   I have been working on this broad topic for a long time in my work on environmentalists being "consistent" in their voting in public markets and their "voting their pocket book" in private markets.   Is this PNAS project a foreshadowing of Big Brother?   This depends on how concerned we are about future scenarios where subgroups of the population are easily identified.  While we celebrate "targeted advertising", we are also scandalized by "targeted oppression".  So, do we want transaction costs of identifying subsets of individuals to be high or low?   When do you value your privacy versus when do you want to let it "all hang out"?

Friday, April 26, 2013

University Tradeoffs Part II: Lessons from Yale

In this age of austerity,  ambitious universities are now confronted with some serious tradeoffs.   Even the very best universities are wrestling with these challenges.  For evidence, read this about Yale.   To an economist, the obvious solution here is more price discrimination.  This Yale article says that 43% of the undergraduates pay the "full price" of roughly $53,000 per year.  Why not charge them $106,000 per year and sketch out the demand curve for Yale?    The university has an undergraduate enrollment of roughly 5,000. If .43*5000 each pay $53,000 more than this equals $113 million more dollars in revenue per year for the University and the $40 million dollar deficit vanishes.    I realize that this is an extreme experiment but the readers of this blog know something about differentiated products and inelastic demand. In English, if you offer a high quality product you can get away with price gouging.  Why not gouge?   Is the 43rd percentile of Yale's student body "middle class"?  Can their parents afford $106,000 per year?  There are other schools to attend. You could come to UCLA and take my class.    Note that my pricing regime generates a serious revenue inflow that would allow for more generous financial aid for the 57%.    We all want a sweet deal and I want my hair back but that's not going happen.

The Deans of our Universities needs to start acting like Bill Gates (when he ran Microsoft) rather than acting like Bill Gates (now that he runs his non-profit foundation).

Tuesday, April 23, 2013

Is There an Excellence vs. Affordability Tradeoff at the University of California?

My Governor is getting ready to launch a high stakes field experiment.  While this could yield a QJE publication for him, it could seriously injure the quality of education at UCLA and UC Berkeley.   He is mandating that the University of California will receive more public cash but he is demanding a tuition freeze for several years and he wants a sharp slowdown in enrolling out of state students.  

During this time of stress for the 99%, it is certainly laudable to consider making California's elite public universities more affordable but does the strings he has attached pose a threat to maintaining long run excellence at UC's best campuses?

While economists always focus on tradeoffs, there is the implicit belief in Sacramento and in some of Dean's Suites that the University of California can remain excellent and cheap (relative to Ivy League tuition).  This "free lunch" notion is foreign to me.    President Obama's new health law is going to suck up a huge number of dollars for the UC's teaching hospitals.  I predict that these teaching hospitals will be running huge deficits soon.  How will the UC finance this?   I don't think there has been a serious analysis of what the UC's finances will look like once the health law is fully implemented.  As a great man once said to me;  "Hell University has two Medical Schools!".

Faculty salaries and benefits are the major expenditure item at the UC.  To reduce cost and increase "affordability" means hiring fewer faculty and fewer expensive faculty.  In the short run, this is "wise" in terms of containing costs but in the medium term --- this starts the death spiral. In an age of no mandatory retirement, the UC faculty will become even older.  I plan to retire at age 60 and I would like to see more UC faculty join me in this pledge.

UPDATE:  Take a look at these demographics data about the UC in 1990 vs. 2011.

In 1991, only 15% of the total faculty were over age 60. In 2011, this share has grown to 28%.   The share over age 65 has grown from 5% to 15% between 1991 and 2011.

IZA's New Environment and Employment Group

I've joined the IZA as a Research Fellow in its new Environment and Employment program.   Over the years, I have written several papers examining how environmental regulation affects the location of industrial activity in the United States.  Here is my paper from 1997 and here is a paper (joint with Erin Mansur) that will soon be published in the Journal of Public Economics.

What are the "big questions" in this subfield?

1.  In the developing world, as environmental regulations are tightened in the wealthiest cities, does this accelerate the decentralization of industrial employment to 2nd and 3rd tier cities?

2.  In 2013, are dirty industries still capital intensive so that the factor endowment hypothesis can overwhelm the pollution haven effect so that richer capital intensive nations retain dirty industry?  (so retesting the Copeland and Taylor core hypothesis).

3.  Building on Josh Zivin's recent work, how does external environmental conditions affect worker productivity?  Does urbanization mitigate this effect since people are working inside?

4.  As states such as California enact carbon mitigation legislation (AB32), how many jobs does this create (i.e green jobs) and how jobs does this legislation repel?  How can such counter-factuals be credibly constructed?

5.  Who bears the incidence of environmental regulation?  Which industries raise consumer prices versus firing workers when regulation increases?

The one thing I'm puzzled about here is methodology. In this age of the "field experiment", how can this methodology be used to study the relationship between "environment and employment".  One possibility is randomized audits of firms as a pollution deterrence strategy but I'm having trouble thinking of other examples.

Monday, April 22, 2013

Krugman on Duration Dependence and Unemployment Probabilities

Ph.D. economists could distinguish themselves from other bloggers if we could concisely explain (using plain language) how academic economists test hard "real world" relevant policy questions.  Paul Krugman achieves this ideal today in his column focused on his belief that there is a causal relationship between being unemployed now and the probability that you are unemployed later.  He is agnostic about whether this effect is due to the perception among firms seeking workers that the unemployed suffer from skill atrophy or whether an unemployed person's skills actually do decline when they have nothing to do.  His evidence for his claim is based on the following field experiment; (here is quote)

"But as William Dickens and Rand Ghayad of Northeastern University recently showed, the relationship has broken down for the long-term unemployed: a rising number of job openings doesn’t seem to do much to reduce their numbers. It’s as if employers don’t even bother looking at anyone who has been out of work for a long time.
To test this hypothesis, Mr. Ghayad then did an experiment, sending out résumés describing the qualifications and employment history of 4,800 fictitious workers. Who got called back? The answer was that workers who reported having been unemployed for six months or more got very few callbacks, even when all their other qualifications were better than those of workers who did attract employer interest.
So we are indeed creating a permanent class of jobless Americans."

Permit me to crack a half joke.  I would say that the rise of field experiments as a research methodology is another reason that there is high unemployment in the U.S!   In the past, labor and environmental economists argued that high union wages and environmental regulations caused firms to move abroad to cheaper pollution havens. In this age of field experiments, another reason for firms to move abroad is to avoid applied researchers!   It would interest me if the IRB at Universities consider the value of a firm's lost time dealing with deception when it approves a study such as this one.  

Sunday, April 21, 2013

Watertown, MA and House Price Appreciation Caused by the Terrorist Manhunt?

I used to live in Belmont, MA.  Belmont is adjacent to Watertown.  Watertown now has some new notoriety for being "ground zero" in the recent manhunt.   This NY Times article has the details and offers this quote;
"On Saturday morning, Sunny McDonough, 34, a hairstylist and accountant who lives in Watertown, brought her 3-year-old daughter to Dunkin’ Donuts for a treat after having been cooped up for so long.
Ms. McDonough said she expected the ordeal to bring more people to Watertown. “Now we’re on the map,” she said. “And I think our property values are going to go up by 10 percent. Everyone knows where we are now, and they might be more inclined to visit and go to the diner and the stores. We’re really a safe, suburban community,” she said — and then caught herself and smiled. “Except for the terrorist hiding in the boat.”"
Ms. McDonough knows some urban economics.  Hedonic researchers continue to estimate "new news" real estate regressions.  Whether the new news is the discovery of a Superfund Site, or SARS in Hong Kong, or a sex predator living in your neighborhood or now this, real estate economists measure how house prices change as the information is revealed.  She posits that in this case the effect is a gain!  

Saturday, April 20, 2013

Useful Stata Programs for Answering Kids' Tough Math Questions

My son convinced me that I have forgotten the quadratic formula.  I guess such knowledge isn't needed to be a Professor?   For parents who are facing tough questions from their kids, here is a Stata program for approximating the solution to any non-linear function.  Below,  I also provide a prime number solver.

/* Non-Linear Equation Solver that approximates the solution to
 X^4  +  3*X^3 - 2*X^2  =   543007 by searching in increments of .001  */

input z
expand = 1000000
* the program searches for the answer in increments of .001
gen x=_n/1000
gen alex = x^4 + 3*x^3 -2*x^2 - 543007
gen m=_n
sort m
* note that that for small x values that alex < 0, we search for that value of x such that alex was < 0 but then alex > 0
keep if alex[_n-1]<0 alex="" amp="" n="">0
list x alex

Here is a program for figuring out whether any positive integer is prime or not;

input z
expand = 4935679
gen x=_n
gen prime= 4935679/x
gen m=int(prime)
keep if prime-m==0
* If more than 2 rows appear then the number (in this case 4935679)  isn't prime

The New York Times Highlights The Role of Structural Econometrics

This NY Times piece provides insights and a photo of Larry Katz with his dog at NBER.  The piece builds on a long running agenda at the NY Times to highlight that consumers often make "mistakes".  The NY Times loves behavioral economics (perhaps because it creates a large opening for benevolent paternalists) and this article has that flavor.  Here is the story in a nutshell;

1.  Parents love their 18 year old child.
2.  Child has fallen in love with a city/university based on little information --- perhaps a tour of the school, perhaps a YouTube video , perhaps friends are already there.
3. Child does not know what she wants to do with her life
4. Child does not know the causal effect of attending school listed in #2 on achieving her ambiguous life goals (see #3 above).
5.  Child has choice between UCLA (very very good "cheap" public university) and Ivy League School (higher price and higher prestige).
6.  Middle class parent bankrupts himself paying for Cornell over UCLA and later regrets the choice.

Does capitalism work in a one shot game?  Kids only go to college once.  

The 6 items I list above bundle several structural issues in modern economics.

1. altruism within the family and the benevolent parent transferring human capital rather than a bequest at his death to the child.
2.  Choice under uncertainty where the uncertainty is over the kid's preferences and the quality of the match between the kid and the school
3.  Uncertainty over occupation choice and over the future of the macroeconomy (will Wall Street continue to boom).
4.   Labor economics is all about estimating causal effects of specific treatments.  Will attending Harvard raise your probability of getting a job at Facebook by 9 percentage points?
5.  How do we compare apples (UCLA) and oranges (Cornell)?  What are the finite set of attributes used to describe each?
6.  Financing investments is a major topic in modern economics whether it is financing human capital or a house or a new road. Which investments pass a "cost-benefit" test? and how do we measure such investments under uncertainty and when the consumption factor (my kid is an "ivy leaguer") is part of the dividend flow.

This article really highlights the importance of the structural econometrics research agenda.  I haven't even mentioned the supply side. Why is the supply of slots at excellent universities so vertical?  Why can't new excellent universities be created by the large number of billionaires in the world?  Is the supply of professors who can teach and do research really so limited? What is the scarce resource that reduces entry such that the Ivy League keep their monopoly?

Friday, April 19, 2013

UCLA Bans Smoking on Campus

Who says that the "natural experiments" era is over?  For those looking to research another topic besides for the correlation between debt ratios and growth, I would like to suggest that you consider working on the consequences of UCLA's new smoking ban.    While the penalties for violating this new rule are not listed, let's suppose there is compliance.   Could the following happen?

1.  Will anger and fights on campus rise as the smokers go cold turkey?  (free nicotine patches will be distributed for 2 weeks).

2.   Will the smokers actually reduce their total daily consumption of nicotine?

3.  Will the smokers gain weight?  Six months from now will they be healthier than they are now?

4.  If certain nations have higher smoking rates than the U.S, will their students choose to attend another pro-smoking school?  

5.  For those smokers who wanted to quit, will this new law solve a peer pressure co-ordination problem that our smoking students wanted to quit smoking but only if all all of their campus friends also quit.  They feared being labeled "losers" if they unilaterally quit while their friends continued to smoke?

In this age of benevolent paternalism, the faculty hope that our Leaders introduce more policies to improve our quality of life.   There could be a single choice of entree each day at the Faculty Center that offers the highest nutritional value and minimal ecological damage.   The Leaders could also choose what clothes faculty and students wear?

I do support this smoking ban but precedent is always dangerous.

Thursday, April 18, 2013

Robert Fogel's New Book

As I walk around UCLA's campus on another sunny blue sky 75 degree day, I spot my colleagues from a variety of subfields and I ask myself; "Is that guy still working? What has he done recently?"   For the University of Chicago's Robert Fogel, I already know the answer.  This 86 year old Nobel Laureate just published a new book about Simon Kuznets and    I have already read my free copy.   Professor Fogel and his co-authors (including his wife Enid Fogel) meld a biographical tribute to Kuznets with a focus on why his research agenda was so important and simultaneously provide an intellectual history of early economics at the NBER during the early and mid 20th century.

While I can't claim to be a big fan of national income accounting, I know why this is an important exercise.  From reading the book, I can see that Kuznets' commitment to original data collection and careful empiricism set a high mark for his student Robert Fogel.  Bob Fogel has served as my wife's mentor for the last 25 years  and I have had the good fortune to get to know him and learn from him.   I can only hope that when I turn 86 in the year 2052 that I will be 1/2 as productive as Bob is right now.

Monday, April 15, 2013

Cochrane vs. Krugman

John Cochrane's WSJ piece is a must read.   If Cochrane and Krugman sat down together in a civil setting,  here are the questions I would like to ask each of them.

For Krugman;

1.  What evidence from applied labor economics convinces you that the long run costs of recession are very high?  Isn't unemployment a short run vacation?  What research on duration dependence (i.e that being unemployed now reduces your chances of finding a job later) has convinced you that unemployment has huge social costs?

2. Given government's weak track record in efficiently allocating scarce capital, what is your evidence that this time "it will be different" and that our government will efficiently invest in worthy projects (such as Heckman's early age investments initiative) rather than in pork projects and more of the usual?

3.  Budgets must eventually be balanced.  Do you worry about the deadweight loss and long term economic growth implications that Cochrane suggests are huge?  If we sharply raise taxes do we become France and Greece?

For Cochrane:

1.  What do growth economists know about the long run determinants of growth?

2. What is the causal relationship between higher taxes and a slowdown in educational investment and a slowdown in innovation?

3. What would entrepreneurs such as Mark Zuckerberg do all day long if they face a 80% marginal rate?

4.  Acemoglu's work emphasizes institutions as the main cause of growth.  Could higher taxes now help to improve our institutions?   Unlike the modern political economics literature, your WSJ doesn't touch on political power and how we rebuild the middle class.

Friday, April 12, 2013

AAG 2013

I have left West LA and I'm now sitting in the Westin Hotel near the LA city center.  Why am I here? I am participating in the 2013 Association of American Geographers' Annual Conference.  It slightly resembles the scene at the ASSA Annual Meetings. I see lots of happy young people running around.  I went down to the book exhibit and met with some folks who I may write a book with in the future on "green real estate".  In 30 minutes, I will participate in a Plenary Session on Geopolitics and Climate Change.  My witty remarks on the keynote address will be published in a journal called Political Geography.  

I don't often have the opportunity to explore Los Angeles.  The traffic nudges one to never leave the comfortable surroundings of Little Holmby.   As my cab passed by the Staples Center, I looked for Kobe but didn't see him.  The Westin Hotel is about 2 miles away from the Staples Center.  

I wonder if there are any other Ph.D. economists here.  Could I really be all alone in this Universe?

Wednesday, April 10, 2013

Congressional Influence as a Determinant of Subprime Lending

Stuart Gabriel, Ryan Vaughn and I have written a new paper that uses some funky data to take a look at how a leading subprime bank priced its credit and sized its loans during the 2003 to 2006 period (the bank died in February 2007).   Everybody knows that banks seek out "good borrowers" who won't default and so we control for borrower attributes such as FICO Score and household income and the race of the borrower.  Since we know the zip code of the loan, we control for year 2000 Zip code attributes such as the socio-economic and racial attributes of the community and the state/year/month fixed effects for the loan's location.     We use County Business Patterns data to control for the count of jobs in the zip code/year.  You might expect that lenders are more willing to lend at better terms when the local economy is doing well.

Controlling for all of these factors, we explore how 7 dimensions of the borrower's Congressional Representative are associated with the loan pricing and loan amount.

The 7 dimensions are;

1.  Is the Representative a "Leader"  (Speaker of the House, Majority Leader, Minority Party Leader, Majority Whip, or Minority Whip).
2. Is the Rep on the Finance Committee
3.  The Poole-Rosenthal conservative index score (dwnominate1 from political science)
4. terms served in the congress
5.  Did the bank make direct campaign contributions to the Representative?
6. Is the Representative Black?
7. Is the Representative Hispanic?

Our major findings are as follows;

  • Borrowers in Leaders' districts get better deals measured in terms of lower interest rates and larger loans.  This is especially true if the borrower is black.
  • If the lender made campaign contributions to the congressman's district, then the bank offers lower interest rates to borrowers in that district
  • We reject the hypothesis that the representative's race matters.  Some have conjectured that subprime banks sought to curry favor with minority representatives.

So, why is this interesting?   The "political influence" literature has focused on observable campaign contributions as the main way that industry influences politicians but a more hidden form of influence is for banks to be nice to local constituents.   Using data on over 900,000 loans, we are able to detect these patterns.   The Leaders are powerful and they sought for more home ownership and a greater rate of minority home ownership in their districts.  Subprime banks knew this.  During the boom of the 2000s, you could imagine a "double bottom line" mind set that the subprime banks by lending on better terms to blacks were making money and allowing more Americans to have access to the American Dream.

We think it is interesting that New Century (the bank we study) simultaneously made campaign contributions to certain Representatives and gave better deals to their constituents.  Giving on several margins and being active in such communities is a way to earn Congressional loyalty.  While we don't know how New Century cashed in on this loyalty,  political capital is a relevant "capital stock" that major firms seek to accumulate.

Tuesday, April 09, 2013

The Upper Hand and Political Leadership: The Role of Reagan and Thatcher as Causal Macro Effects

Paul Krugman examines whether Margaret Thatcher deserves credit for England's strong years during the 1990s.    Here is a quote:
"Well, there’s a bit of a problem: Thatcher came to power in 1979, and imposed a radical change in policy almost immediately. But the big improvement in British performance doesn’t really show in the data until the mid-1990s. Does she get credit for a reward so long delayed?"
I think the big issue here is one of expectations and how political leadership affects expectations in negotiation games.    There is a famous Seinfeld Episode where George attempts to obtain "the Upper Hand" in a relationship.   In a game theoretic sense, both Reagan and Thatcher helped to achieve the "Upper Hand" on aggressive labor union demands and this created an economic environment where jobs were created.

This issue is playing out now in Los Angeles in the race for Mayor.  Both candidates are good people who would be fine Mayors but both appear to be beholden to the unions.  Facing this reality, will there be private sector job growth in the City of Los Angeles over the next 4 years?  In this age of rapidly changing market opportunities, firms need the flexibility to fire at will. If they anticipate that they can't fire, then they won't hire and we become Greece and Spain.   Both Thatcher and Reagan signaled that a regime shift had taken place in labor markets and this flexibility (and thus convergence between the real world and the neo-classical model of perfectly competitive labor markets) offered medium economic growth benefits.

Monday, April 08, 2013

My Harvard Business Review Blog Piece on China's Bullet Trains and a History of My Economic Thought About China

Rob Stavins recently provided a popular overview of his research initiatives over the last 25 years.  In this blog post, I will present a mini-version of my own overview of my China research over the last 7 years.  For folks who find this interesting, you will be happy to know that the Journal of Economic Literature will publish my piece this September and Siqi Zheng and I are getting closer to having a full length popular book that fleshes out all of the subjects I discuss below.    Before I start this involved discussion, I encourage you to read my new Harvard Business Review piece on bullet trains.

All of the research I discuss here lie at the intersection of environmental, urban, energy and real estate economics.  They all relate to my lifelong interest in "Green Cities" but now my focus is China.  All of this work is joint with Siqi Zheng on Tsinghua and several other great co-authors.

1.  We investigated the pricing of Beijing residential real estate using geocoded land sales and pre-sold apartments.   Both the monocentric model and the theory of compensating differentials help to explain the observed patterns.   Access this paper.

2.  Following the cross-city U.S compensating differentials literature, we measure cross-Chinese city compensating differentials for pollution and climate.   We also document an Environmental Kuznets Curve for China's cities at a point in time and find that several of China's richer cities have past the "turning point". We document a negative correlation between City FDI inflows and Pollution concentrations. This evidence goes against classic pollution havens claims.    Access this paper.

3.  Building on Glaeser and Kahn's (2010) study ranking the household carbon footprint of U.S cities for standardized households,   this study uses high quality household micro data to rank China's cities with respect to their household carbon footprint.   Access this paper.

4.  This paper investigates the nascent market for "green buildings" in China. We document the need for formal certification of these buildings so that developers cannot make false claims about their building's performance.  Access this paper. 

5.  We investigate the consequences of China's investment in bullet trains on 2nd and 3rd tier cities that now have increased access to the mega-cities. This paper uses cross-city real estate pricing data and calculates changes in market potential brought about by the introduction of the bullet train.  Access this paper.

6.   We study the cross-city capitalization of ambient air pollution into Chinese home prices using an instrumental variables strategy that exploits cross-geographic imports of emissions from nearby pollution sources. Such "random" variation in pollution allows for more credible compensating differentials estimates than relying on OLS estimates.  We document significant heterogeneity of this capitalization as a function of the city's income, education and hukoo migration limits.  Access this paper. 

7.  We study the incentives of Chinese mayors to provide public goods for the public.  The "rules of the game" are changing for these leaders and they now face stronger incentives to supply "blue skies".   Access this paper.

8.   We study how private sector real estate investors and restaurant chains in Beijing respond to enormous public investments in new subway lines. We find that private sector investment increases in geographic areas where the public sector has invested.  These joint investments stimulate gentrification in these "treated" parts of the city.  Access this paper. 

Sunday, April 07, 2013

Water Prices in Texas

The NY Times published a pretty good piece today by Kate Galbraith on drought adaptation in Texas.  She points out some pro-active actions by the state to bring supply and demand into balance.

"The implications have finally sunk in among lawmakers and business leaders here, who like to boast about the economic appeal of Texas’s low taxes and relaxed regulatory environment: no water equals no business. In a state fabled for its everything-is-bigger mentality, the idea of conserving resources is beginning to take hold. They are even turning sewage into drinking water.
The overwhelmingly conservative and tightfisted Texas House of Representatives recently voted to create a fund to finance water development and conservation projects and is considering allocating $2 billion to jump-start it. The State Senate is weighing a similar measure. The state’s water plan, released last year, recommends spending $57 billion (in 2013 dollars) over the next half-century to ensure there is enough water to go around; Texas’s population of 26 million is expected to grow by 80 percent by 2060."
The piece would merit an A+ if she bothered to collect data on water prices in Texas.    I dock her points because of this silly sentence;   "Economies will rise and fall on the availability of water, whose price is inexorably marching upward."   She implies that it is a bad thing that water prices are rising.  For capitalism to work its magic in helping us to adapt to climate change we need this price to rise. Let the price system signal scarcity.  Why does the NY Times favor a command and control economy?  

Had Ms. Galbraith looked up some data, she might have found this chart on residential water prices across cities.      Dallas residential water bills are 50% lower than Boston's!  A family of 4 that consumers 50 gallons per day per family member has a monthly water bill of $38 in Dallas!    If there is a drought, let prices reflect this scarcity and then allow the free market to work.    Those who fear free markets can't have it both ways.  You can't oppose free market prices and then bemoan "crisis".    If you like to play the game that way, you can move to North Korea.  That enlightened country also follows this pricing approach.

Saturday, April 06, 2013

Hidden Subsidies

The Sacramento Bee offers a case study of an under-studied topic.  In Davis, California,  a new lawsuit contends that residents have been paying a price premium for sewer use and this collected money has been silently used to cross-subsidize the disposal of waste water from government buildings.  So, this is a hidden tax on the populace that is mostly borne by those who create the most residential waste water.  In recent years, economists such as Chetty and Finkelstein have written about the salience of taxes and government charges.  You don't have to be a behavioral economist to realize that government anticipates the opposition to higher taxes but must fund its expenditures. An alternative way to achieve this goal is to raise prices for goods it supplies for which there is no competitive market (such as poop water disposal). In such cases, residents are unaware that they are  being "ripped off" because they can't shop around for a price quote from a competitor.  The local government is aware that "ignorance is bliss" and takes advantage of this.

As I think about it, the more general issue here relates to bundling and monopoly power.  Due to natural monopolies (i.e high fixed costs to entry) and the legal charter,  local government faces no competition in providing many services ranging from policing to waste disposal to K-12 education.  

Contrast the City of Davis with a multi-product monopolist.  The profit maximizing monopolist who sells both lightbulbs and lamps will estimate the elasticity of demand for both products and offer a low price for the more elastic demand product so he can stimulate demand for the complementary product and  "price gouge" in selling the inelastically demanded good.   In contrast, the City of Davis is a multi-product non-profit maximizing monopolist.  It has similar incentives to "price gouge" on inelastically demanded services because this will increase its budget resources.

Universities, including my own, are like the City of Davis as the budget process is quite opaque and this is quite likely to be intentional.   This raises efficiency issues.  For an example from UCLA read this.

Friday, April 05, 2013

Human Capital and Insurance Markets as Tools for Adapting to Climate Change

In drought struck Texas, ranchers differ with respect to their ability to handle the tough climate conditions.   The NY Times documents the heterogeneity and celebrates human ingenuity.  The article also notes the role that insurance plays in providing income in "bad states of the world" (i.e no rain).

The ranchers are also learning about the joys of holding a diversified portfolio of land assets;
"He also has developed another source of revenue: hunters from Dallas and Fort Worth who pay to shoot the quail that like to nest in the bunch grasses on his land."

Thursday, April 04, 2013

Time to Build: The Case of Chinese Airports

The New York Times has some nice things to say about Chinese public sector efficiency.  The piece hints that you have to break some eggs to make an omelette but it acknowledges that China is building a high quality public capital stock at low average cost and a low time cost. These megacity airport investments are helping China's cities to grow at a time when U.S urban infrastructure all has that nasty 1950s cracking look to it.   The New York Times could have done a better job if it had sat down with a spreadsheet and calculated the total union labor cost of building a similar airport in the U.S and the NIMBY land siting issues and land regulation lawsuits that would be required for assembling the necessary land for building a major airport.

Wednesday, April 03, 2013

Want to Be a Manly Man? UCLA Research Says; "Eat Walnuts"

While I prefer to document correlations, there is a whole crew seeking to measure "causal effects".  Reading most of these papers, I would describe them as recovering "casual effects".  But, today I found an exception.   This blurb   highlights some exciting UCLA research.

Last year, experts at the University of California Los Angeles also found young men in their twenties and thirties who ate walnuts every day increased their sperm count and boosted their fertility. 
This raises an interesting marketing question. While I watch NBA basketball games on TV, why don't I see more walnut ads next to the beer and fast food ads?   Think outside the bun!

For those who want to read the real paper;

Robbins, Wendie A., Lin Xun, Leah Z. FitzGerald, Samantha Esguerra, Susanne M. Henning, and Catherine L. Carpenter. "Walnuts improve semen quality in men consuming a Western-style diet: randomized control dietary intervention trial." Biology of reproduction 87, no. 4 (2012): 101.

Tuesday, April 02, 2013

25 Years?

Back in early April of 1988, I made my first visit to the University of Chicago to attend its Recruiting Day.  I have fairly clear memories of that day but it is hard to believe that 25 years have passed.    As I speak to admitted UCLA students who are considering attending graduate school here in 2013, I flash back to my Recruiting Day.   I remember Robert Lucas walking into the room and telling the impressed students that "at Chicago, the faculty took economics seriously".  I didn't know what he meant but I knew he meant that I didn't know. (good sentence?)

That day, I met Ed Glaeser and Erzo Luttmer  and my future wife.   I immediately saw that this was a peer group I could learn from. I still remember Glaeser quizzing me on the substance of my undergraduate thesis at Hamilton College and his detailed discussion of his own thesis he was completing at Princenton.  I was more impressed with his thesis on Paul Volker and Federal Reserve Bank than my thesis on Lucas' island economies and exploiting the Philips Curve.

25 years ago?

Industrial Organization and Minimizing Industry Wide Environmental Externalities

Industrial organization is an exciting field of economics that studies how firms compete against each other to attract business and make $.  Zillions of Econ 101 students have fallen asleep contrasting industries featuring monopoly, duopoly, versus perfect competition.  But, these students were wrong to pass out.  Today behind this fire wall, the WSJ has a real interesting piece  arguing that in terms of environmental safety that bigger is better.  Permit me to explain.

Suppose that the pizza industry produces 1000 pizzas each.   Consider two different industrial organization structures for this industry;

Case A;  One firm produces all 1,000 pizzas (monopoly).

Case B:   100 firms each produce 10 pizzas (perfect competition)

The WSJ argues that there will be fewer accidents in this industry if Case A describes the industry rather than Case B.  


The Case A firm knows;

1. It is so big that disasters will cause public relations disasters as the NY Times will publicize such problems.
2. It will attract regulator attention if disasters do take place and this will incentivize it to engage in more ex-ante costly precautionary investments
3. It has the capital financing to be able to invest in better equipment as it is less likely to be liquidity constrained than smaller firms who do not have the same access to capital.
4. It has higher quality managers running the firm and has a large enough scale to hire specialized human capital with expertise in risk minimization.  

A critic might counter that the big firm has the resources to payoff regulators and Congressional leaders to look the other way when accidents occur but this claim is contradicted by the facts the WSJ piece mentions.

Could "Big Capitalism" be a friend of the environment relative to perfect competition?  

The links between an industry's composition of firms (holding the total scale of output constant) and the industry's environmental performance has not been studied by modern economists.