My Return to Doing Macroeconomic Research

Many economists have trouble publishing their personal histories of their own economic thought. Since, I run this blog, I have accepted the following entry for publication and I will soon make an interesting point.  At Hamilton College in Spring 1988, I wrote my undergraduate thesis on a mild extension of Robert Lucas's famous empirical Phillips Curve work.     In fall 1988, I entered the University of Chicago's PHD program and had the brief opportunity to tell Dr. Lucas about my new work.  Let's just say that he didn't encourage me to continue this line of research.  As he walked away, I said to myself;  "Maybe I'm not a macroeconomist".  

Until late 2014, I never had another thought about macroeconomics.  But, every story has a happy ending.  Today,  Josh Graff-Ziviin and I have released our new NBER Working Paper.  Here is the abstract:

How will a nation’s aggregate urban productivity be affected by climate change? The joint distribution of climate conditions and economic activity across a nation’s cities will together determine industrial average exposure to climate risk. Air conditioning (AC) can greatly reduce this heat exposure. We develop a simple model of air conditioning adoption by heterogeneous firms within an industry. Our analysis suggests that high productivity firms are more likely to adopt AC since they suffer larger productivity losses when it is hot. Given that the most productive firms produce a disproportionate share of industry-level output, we present aggregation results highlighting how the industry’s output is insulated from the heat. Our empirical analysis of the impacts of heat on total factor productivity in U.S manufacturing yields findings broadly consistent with our model’s predictions.

This is the age of "micro-macro".  We write down a firm level air conditioning adoption model and then aggregate it up to understand an industry's overall % of activity that is air conditioned.  Since the most productive firms air condition, the bulk of the industry's activity is protected from the climate.  The micro researchers who run OLS focus on the average firm but in this age of inequality, the right tail firms are the key firms and they are protected from the heat.

I am back as a macroeconomist!  I may write Lucas to see if he will reconsider my old Phillips Curve work!  (I'm kidding).

Our paper has clear implications both in the cross-section and for a given nation over time in how to use micro data to study macro aggregates.   The Gabaix 2011 Econometrica played a key role in influencing my thinking here.  For those who read the paper, I hope you see how Sherwin Rosen's work on compensating differentials also influenced this paper.

The climate economics literature has been missing optimization and self protection and adaptation.  Our paper injects such "economics" into this literature.