Saturday, August 30, 2014

Elite Slots

When is supply elastic?  What technologies feature roughly constant returns to scale?  At a top restaurant in NYC, the lead  Chef faces a scope and control issue. If the restaurant tried to sharply scale up its number of seats, the Chef wouldn't be able to maintain the quality of the meals.  Contrast this case with housing near a beautiful coast.  In most such areas, the area is zoned for single family homes.  If the area was upzoned and thus allowed multi-family housing, single family homes (even those worth $20 million) would be bought and knocked down and a 50 unit building would be built with each condo selling for $1.5 million.  This change in the rules would increase access and the total value of the land.    The supply of housing near the coast would become more elastic. Yes, I understand that I'm equating a single family home with a condo as a "house" but if a $20 million dollar home can be "turned" into $75 million dollars worth of new condos then value has been created in allowing such transactions to occur.   The real estate law in this case is causing the paucity of elite slots.

Scholars such as Robert Frank routinely talk about the zero sum game for status goods but this pessimism hinges on non-tested assumptions about an inelastic supply curve.   Elite "product" producers such as Yale are  trying to increase their number of students through building new colleges. China is trying to create its own great universities.  I recognize that in a market where reputation matters it can take a long time to convince the public that the new "Kahn University" is a great school and merits comparison with old type great Ivy league schools.  

As I have blogged before the rise of the MOOCS can be thought of as creating a more elastic supply of elite slots.  If society has a shortage of a valued resource then somebody will figure out how to increase its supply.

This is a long winded intro for talking about my teacher Lester Telser's 2013 short paper available here.   He investigates why the cost of running elite non-profit universities is rising over time and links this back to Ricardian rents and rising demand.

For our existing great private universities, they would have trouble scaling up in size.  Most are in urban areas.  NYU has faced stiff internal resistance in its attempts to build up vertical to increase its physical space.   Columbia has had to pay a lot of money for marginal land in its attempt to build a new campus.  Land is expensive near these universities because these universities are there!

For rural campuses (and I can't think of that many major private research universities not in big cities --- in part because of their hospital service and biomedical research), land is cheaper but in this age of power couples could they attract the same quality faculty?

So, from basic supply and demand --- if the 1% want something will its price be high?  This hinges on the shape of the supply curve.    Even the NY Times appreciates this point.  Read today's main editorial.