tag:blogger.com,1999:blog-152004372024-03-13T12:15:10.015-07:00Environmental and Urban EconomicsMatthew E. Kahn
Twitter @mattkahn1966Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comBlogger3976125tag:blogger.com,1999:blog-15200437.post-75192431475269955412023-07-28T07:06:00.002-07:002023-07-28T07:06:36.581-07:00How Will Houston Adapt to the High Heat?
I have moved m<a href="https://matthewekahn.substack.com/p/how-will-houston-adapt-to-high-heat">y blog over to Substack</a> (and I've lost many readers). Please join me there. Here is a recent column.
The Wall Street Journal <a href="https://www.wsj.com/articles/i-dont-want-to-be-here-anymore-the-economic-cost-of-houstons-heat-3cf69016?reflink=integratedwebview_share">has published an important piece </a>about how the high heat is reducing economic activity in Houston. The piece has a pessimistic tone that the heat melts the city’s infrastructure and shaves off economic activity as people don’t want to go outside.
When microeconomists study consumer expenditure dynamics as people buy cars, go out to dinner and buy groceries. During hot spells, people are less likely to go out for dinner or to play multiple rounds of golf. A microeconomist would say that this evidence indicates that people have “state dependent preferences”. In English, this means that how much we enjoy a steak dinner at an outdoor restaurant depends on whether it is 75 degrees outside or 95 degrees outside (this is the “state of the world”).
I certainly believe that hot and humid Houston is in a type of “macroeconomic Siesta” right now and this reduces economic activity. But, permit me to make some counter-points.
#1 The money people in Houston do not spend on the hot July 28th 2023 is still in their bank account and they can spend it on a cooler November 5th 2023 day. Note this intertemporal substitution. The media focuses on the direct effect of the heat (that high heat is reducing economic activity today) but my counter-hypothesis is that it displaces expenditure to the future when it will be cooler later this year in Houston. So, will the New York Times write a piece saying that high summer heat causes a fall boom in Houston? I don’t think so. This type of cross-elasticity is ignored by the “climate crisis” focused media.
#2 The WSJ interviewed a few people who want to leave Houston. As always, they are free to choose. As more workers can engage in WFH, those who hate the high heat will leave the city in summer. If they own a home, they can AirBNB it. WFH is a climate adaptation strategy as it makes people more geographically footloose. I discuss this in my 2022 book.
#3 We have to live somewhere. Is Houston becoming more miserable to live in summer than other cities? If the answer is “yes”, then its home prices will fall. Here are some data from Zillow.
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Even with higher interest rates, I don’t see a collapse here in the Zillow index. Are you going to sell short Houston homes as your strategy to get rich? Incumbent home owners form a strong interest group to invest in adaptation strategies to protect their asset’s value.
WHAT are possible adaptation strategies?
#1 Road construction materials can be re-evaluated to reduce the urban heat island effect. Read this report. The City has strong incentives to embrace the cost-effective strategies discussed here.
#2 Golf courses can open up part of the area and charge people to enter on hot days to use them as private parks.
#3 Here are personal cooling strategies.
On a personal level, of course the city needs access to strong air conditioning. Firms that make them and repair them will enjoy a boom. The Electricity GRID must remain reliable.
The Climatopolis logic is that Houston competes with other cities to attract successful people and firms. The system of cities and the fear of brain drain gives Houston’s leaders and land owners strong incentives to be pro-active in adapting to climate change. Such efforts will be messy as there will be fights over who pays for such local public goods but the end result will be a more resilient Houston where the high heat causes less economic damage in the short term and medium term. This is the climate change adaptation hypothesis.
Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-57018098116339675422023-02-07T06:52:00.007-08:002023-02-07T06:52:53.079-08:00The New Economic Geography of WFHThe New Economic Geography of WFH
Matthew E. Kahn
Over the last three years, companies from all over the world have learned valuable information about how their firm’s productivity and worker satisfaction is affected when workers can engage in Work from Home (WFH) on at least a part-time basis. Each firm faces fundamental tradeoffs in not requiring workers to return full time to the office. On the one hand, WFH accommodates worker lifestyles and responsibilities at home. WFH workers gain from commuting less often and some may choose to live further from their place of work because they commute in on fewer days. Firms with happier workers are less likely to face retention challenges and will pay less retraining workers. Given that WFH is a non-taxed perk, firms that offer this job amenity can be less generous in giving workers pay raises. Firms located in expensive areas can economize on expensive commercial real estate. If a firm requires that workers be in the office just half the week, then a firm can reduce its space requirements by 50%! On the other hand, firms benefit from face to face communication. Younger workers gain more from such mentoring. Building up the firm’s culture and monitoring worker effort is easier to do if workers are on site.
Each company has a strong incentive to experiment with different workplace practices to learn what works best for their organization. The pursuit of profit actually accelerates this learning process. Economists are always looking for new ways to study firm dynamics. The rise of the WFH economy opens up many questions related to what types of firms will encourage their workers to engage in WFH. Famous executives such as Elon Musk at Tesla and Jamie Dimon at JP Morgan have been encouraging workers to return to the office. Why?
Up until now, a lack of data has hindered the systematic analysis of what types of firms prioritize allowing workers to engage in WFH on at least a part-time basis. The newly released Flex Index provides a unique opportunity for researchers.
As an urban economist, I am especially interested in the geographic determinants of why different firms engage in hybrid-WFH. The Flex Index provides data on each firm’s headquarters’ location. I focus on those that are based in the United States. I use data for 2528 of them. For this set of firms, I merged in three geographic variables. The first variable is the Zillow Median Home Price Index. Zillow uses a repeat home price index methodology to create a standardized “apples to apples” measure of home prices that can be compared across cities at a point in time or within a given city over time. In the analysis I present below I use Zillow data from December 2022. The second variable I merge in to the Flex Index is the percent of voters in the Headquarters State that voted for Joe Biden in the 2020 Presidential Election. The third variable I merge in from the Zillow data base is the city’s size. So, New York City is the first ranked city in the nation because it is the largest city. I use these data to test two hypotheses;
Hypothesis #1: All else equal, firms are more likely to engage in WFH work if home prices are higher in the HQ City.
Hypothesis #2: All else equal, firms are more likely to engage in WFH in more Progressive states.
To test these hypotheses, I use a linear multivariate regression framework. To standardize the firms, I include industry fixed effects (this variable is in the Flex Index database). The dependent variable is a dummy variable that equals one if the firm’s workers all work on site. In the database, 39% of the firms report having the workers work fully on site.
Table One reports four regressions with each column reporting a separate regression. I use the regression output to test the hypotheses presented above.
Main Results
All else equal, firms are more likely to engage WFH work if home prices are higher in the Headquarter (HQ) City. Based on the results in columns (1) and (3), I find that for the full set of industries and for the Healthcare and Biotechnology industry that workers are more likely to be engaging in WFH if home prices are higher in the HQ’s city. Based on the results in column (2), a doubling of home prices is associated with a log(2)*-.088 = -.06 or a six percentage point reduction in workers working solely on site. This effect is even larger for the Health Care industry. For this subset of firms, a doubling of local home prices is associated with a 12.7 percentage point increase in WFH. For the other two industries, I fail to reject the hypothesis that firms are not more likely to allow workers to engage in WFH as a function of local home prices.
All else equal, firms are more likely to engage in WFH in more Progressive states. The test of this hypothesis is based on the coefficient on the 2020 Joe Biden vote share. Across all four specifications presented in Table One, I find consistent evidence that firms are more likely to allow their workers to engage in WFH when the HQ is located in a more liberal state. A ten percentage point increase in Joe Biden’s vote share is associated with a 3 percentage point increase in the probability that a firm allows its workers to engage in WFH on at least a part-time basis.
Conclusion
The Flex Index is a terrific new data source that allows empirical researchers to study how different firms are incorporating WFH into their work routines. In my 2022 Going Remote book, I hypothesized that the rise of WFH would benefit workers in high home price areas. The evidence presented here supports this hypothesis. Here, I also find a Red State/Blue State divide such that firms located in Blue States are more likely to allow their workers to engage in WFH. Future research should explain why we observe this fact. Are such firms in progressive states more concerned about work/life balance and gender equality issues? There are many open questions that improved data access will allow for us to provide credible answers.
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Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-20711226266427748392022-12-21T07:53:00.000-08:002022-12-21T07:53:34.428-08:00Homeownership Revisited: An Economist's Perspective
A majority of American adults live in owner occupied housing. As an economist, I celebrate the logic of revealed preference. While many poor people are renters, many non-poor people reveal that the benefits of ownership exceed the costs. In this entry, I would like to delve into the details here. Up front, let me say that I don’t want to discuss the tax code and the nitty gritty of mortgage interest deductions, the GSEs, etc. Instead, I want to talk about why people gain life satisfaction from ownership and what are some of the hidden costs of ownership under our current “rules of the game”. As an urban economist, I want to contrast the private benefits to an adult of owning a home and the local social benefits conveyed to a community when it consists of home owners.
Portfolio Risk from Home Ownership
Let’s start with a personal example. Back in 2000, We purchased a home in Belmont, MA (a Boston suburb), we paid 1/2 in cash and got a loan for the rest. The cash we invested in the home had a next best alternative. We could have invested in a diversified portfolio of assets rather than making a place based bet. By buying this home, we were raising our migration costs for moving away from Boston and thus were losing some option value if the local economy performed worse than the rest of the nation.
A strange feature of the housing market is that owners hold an undiversified portfolio. Imagine an alternative world where I could own 36% of my Belmont home and own 2% of 32 other homes scattered around the United States. This would be a more diversified portfolio. Of course there would be contracting issues in designing this contract. My friend and co-author Joe Tracy co-authored a MIT Press book on implementing these contracts.
The Past Rate of Return on Housing for African-Americans
In 2021, I released an NBER Working Paper where I use several data sets to make a simple point. Here is my paper’ abstract:
“The racial and ethnic composition of home buyers varies across geographic locations. For example, Asians and Hispanics are much more likely to buy homes in California than Blacks and Blacks are more likely to buy homes in Georgia than other demographic groups. Home prices grow at different rates across geographic units such as counties or zip codes. Hedonic bundling inhibits buyers from purchasing shares of different homes and forming a spatially diversified housing portfolio. Spatial variation in purchases suggests that the average rate of return to housing varies across racial and ethnic groups. To test this claim, I construct a geographic shift-share index by combining Zillow geographic specific home price index data with HMDA micro data. The shift share calculations yield the average rate of return to home ownership by purchase year, and sale year for different demographic groups. Over the years 2007 to 2020, Blacks earned a lower rate of return on home purchases than Asians and Hispanics and the sample average. Within geographic areas, average loan differences across racial and ethnic groups are very small.”
Let’s unpack this. Over the last 25 years, cities such as San Francisco, Boston, Portland, Seattle, San Jose, Malibu, and Santa Monica have boomed. None of these cities is known to be an African-American city. African-Americans tend to buy in other cities such as Baltimore, Cleveland and Detroit. What is going on here? (and of course I am telling an Average story —- LeBron James lives close to me in Los Angeles’s Brentwood). African-Americans on average have lower wealth than Whites and are less likely to be able to afford the down payment to buy housing in Superstar Cities. African-Americans are less likely to work in Tech than Whites and Asians and this reduces the likelihood that they are living in the major tech hubs. In the areas where African-Americans have ties, house prices have not appreciated much and this means that the AVERAGE African-American homeowner has earned a lower rate of return on housing over the last 25 years.
Going forward (from 2023 to 2040) will Baltimore’s housing market outperform San Jose’s? This is possible. In my recent WFH Going Remote book, I present microeconomic arguments for why this is possible if Baltimore improves its quality of life.
In closing this section, I want my readers thinking about opportunity cost. If an African-American family owns housing in Baltimore then that money is not invested in the SP500 stock market index. Opportunity cost for asset investments always exist.
What About the Consumption Value of Home Ownership?
When we teach Econ 101, we introduce our students to the utility function. This is the economist’s “thermometer” measuring how much pleasure we gain from different consumption bundles such as consuming beer or pizza. The consumer knows herself and knows her budget constraint and makes the right (affordable) consumption choice. Assuming people are consistent over time, we learn about their priorities from the choices they make as market prices and their income changes.
With this preamble, why does home ownership raise one’s utility? One hypothesis is “pride of ownership”. But what do these words mean? Economists have struggled with modeling the demand for “status”. Economists have taken Veblen seriously and have sought tests of which subgroups of people seek to own and display luxury goods to signal that they are special. Here is a paper about cars and jewelry ownership.
Of course, I understand the desire for status. I continue to submit papers to Top 5 journals and to track my Twitter Follower count! But, the point of this 1/2 joke is that there is an ever increasing number of strategies for producing “status”. As I age, I gain pride by reaching my Google Fit target of 10,000 steps a day.
During my life time, I have lived in fancy rental housing in Manhattan, Singapore, and Baltimore. Given the changing demographics of our population, real estate suppliers will offer rental properties if there is demand.
Don’t Renters Face Displacement Risk and Gentrification Risk?
Yes, but if this is a serious concern then renters can sign longer term contracts up front. Scottie Pippen signed a 10 year contract with the Chicago Bulls at the start of his career because of his fear of injury.
In a renter economy, there would be less support for local NIMBYism and real estate developers would build more housing and this would reduce rent rise risk. The ongoing conversion of commercial urban real estate into residential housing also reduces the likelihood of medium term rent spikes.
I claim that it is time to visit this important paper by Todd and Nick.
Sinai, Todd, and Nicholas S. Souleles. "Owner-occupied housing as a hedge against rent risk." The Quarterly Journal of Economics 120, no. 2 (2005): 763-789.
Neighborhood Social Capital Boosts Due to Home Ownership?
Ed Glaeser and Denise DiPasquale have posited a positive spillover that when real estate is owner occupied that the owner has the right incentives to maintain the property (to maintain the resale value) and to not free-ride in terms of neighborhood attributes such as safety and neighborhood greenness. Their empirical strategy in their applied research was to use panel data at the individual level and observe how the same person behaves before and after she becomes a home owner. A field experiment researcher would want to go a step further and randomly assign similar people at the baseline to renting versus owning and then observe how their home is treated and how their neighborhood’s quality of life changes over time.
I greatly admire their work here but I want to be provocative and argue that their work is out of date due to technological change. I want to return to a paper by
Baker, George P., and Thomas N. Hubbard. "Contractibility and asset ownership: On-board computers and governance in US trucking." The Quarterly Journal of Economics 119, no. 4 (2004): 1443-1479.
These authors tell the following story. Back in the 1970s, truck drivers bringing stuff from California to Baltimore markets had private information about their routes and effort. The food company gave the truck driver a share of the profits to incentivize them to not shirk with respect to effort. The advent of cheap GPS computers meant that the food company could easily monitor the trucker and could now pay him a fixed wage.
The same idea holds in 2023 for rental housing. The big data monitor era allows the property manager to have a very good sense of how the tenant is using the property and what is going on in the local neighborhood. If crime rises, the property manager can hire private guards. If litter increases, a crew can be hired to pick up the trash.
Markets substitute for social capital and volunteering!
Conclusion
The modern Economy’s Big Data revolution and climate change risk both create incentives for more of us to be renters. Going forward if more of us are renters in the year 2040; then we gain the following adaptation benefits; #1; Our assets are less exposed to place based shocks (i.e Hurricane Ian), #2 we hold a real option to move away from areas that turn out to be at greater risk from shocks, #3 There is less lobbying for place based subsidies using national subsidies because “victims” have fewer place based assets at risk (i.e we are each holding a more diversified portfolio). If government steps back from insurance markets, the private sector will step up its game and insurance innovation will further spur the pace of climate change adaptation.
If these ideas interest you, read my 2021 Yale Press book Adapting to Climate Change.Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-91169373875633686902022-11-07T07:02:00.002-08:002022-11-07T07:02:53.415-08:00Understanding the Arguments Made by Climate Change Adaptation Pessimists: Part OneClimate change adaptation refers to our individual and collective ability to cope with Mother Nature’s more intense weather punches in terms of extreme heat, drought, fire, flood and many other place based risks.
My microeconomics research, as sketched out in my 2010 Climatopolis book and my 2021 Adapting to Climate Change books, argues that capitalism accelerates our ability to adapt as market price signals encourage substitution and innovation. Whether government policy complements the private sector muffles the private sector’s efforts continues to be a major research topic. In my 2010 Climatopolis book, I asked; “If Milton Friedman ran the U.S FEMA (and thus committed to no generous ex-post bailouts to shocked places) how much faster would adaptation occur?”
In my ongoing empirical work, I continue to study how extreme weather affects our economy. I see evidence of adaptation progress as the “climate damage function” flattens and this means that the same punches thrown by Mother Nature cause less damage over time. My students are studying this hypothesis in the developing world and investigating what frictions (such as government policy) inhibit adaptation from taking place. An example would be government price supports for agriculture that create a moral hazard effect. See this 2015 paper set in the United States.
My Thoughts About the Work by Two Talented New York Times Journalists
The New York Times continues to be the paper of record. Two of the leading authors for the Times are Christopher Flavelle and David Wallace-Wells. I link to their work so you can read it on your own. David recently published a huge New York Times Magazine piece that you can read here.
I want to keep this entry short but I plan to expand upon the themes I present below. I must acknowledge upfront that I have not interviewed either of them about their climate change adaptation pessimism. My points I present here are based on my reading of their work.
How Does a “Climate “Crisis” Emerge?
Global greenhouse gas emissions will continue to rise. Read our 2022 NBER paper.
We do not know how much global average temperatures will rise due to rising emissions and we do not know what “crazy” weather will emerge because of what we have collectively unleashed.
In a series of case studies, Flavelle argues that we have built up billions of dollars of place based capital in increasingly risky areas such as Florida that face more severe disaster risk. He emphasizes the moral hazard effect that the expectation that there will be Federal Bailouts of struck areas encourages more rebuilding in these areas. So, he is telling a story that we do not learn from our mistakes. He does not explain who is the “adult in the room”? Why don’t city urban planners, the mortgage lending industry, the real estate development industry, the insurance industry adopt new “rules of the game” so that new real estate development is nudged to “higher ground” or if we build in risky places that private actors are incentivized to invest in pre-cautions that reduce the damage caused by the next storm.
Starting with my Climatopolis book, I have argued that if people make place based bets (such as investing in Miami real estate), then they should flip two sided coins. They get to keep the upside appreciation if local prices rise but they also must “eat” the downside loss if local prices decline because of rising risk and better opportunities in other real estate markets such as Boston or Houston or Buffalo.
I do respect his point that the public sector activism in insurance markets is causing an important free market distortion. As the social cost of this distortion rises, economic theory predicts that political reform will take place. Why should tax payers on “higher ground” bail out risk takers over and over again? Why reward “bad behavior”?
As we saw with the economy’s reorganization during the COVID crisis of 2020, markets adapt and change when new news occurs if government does not distort price signals. The rise of the Zoom WFH experiment was an amazing example of adaptation.
David Wallace-Wells argues that adaptation is costly and will exacerbate existing inequality. A quote
“Talk enough about adaptation, and you drift into technical-seeming matters: Can new dikes be built, or the most vulnerable communities resettled? Can crop lands be moved, and new drought-resistant seeds developed? Can cooling infrastructure offset the risks of new heat extremes, and early warning systems protect human life from natural disaster? How much help can innovation be expected to provide in dealing with environmental challenges never seen before in human history?
But perhaps the more profound questions are about distribution: Who gets those seeds? Who manages to build those dikes? Who is exposed when they fail or go unbuilt? And what is the fate of those most frontally assaulted by warming? The political discourse orbiting these issues is known loosely as “climate justice”: To what extent will climate change harden and deepen already unconscionable levels of global inequality, and to what degree can the countries of the global south engineer and exit from the already oppressive condition that the scholar Farhana Sultana has called “climate coloniality”?”
These are great questions but note that these are economics questions. What is the quality adjusted price of the goods we need to continue to be safe, comfortable and healthy? David Wallace-Wells owns a computer and a cell phone. These products didn’t exist in 1940. Every day they grow cheaper and become of higher quality. This is what market competition does. More poor people in the developing world can afford these products as quality adjusted prices decline.
Note that Wallace-Wells is rightly concerned with poverty and the challenges that poor people will face going forward. An economist would reply to his pessimism; “okay, you are not worried about Elon Musk’s ability to adapt to new risks. Let’s rank all of the world’s population with respect to their income. Who are the people who currently do not have the capacity to adapt to the serious challenges that wacky weather is posing? What income growth would give them the opportunity to adapt? Why isn’t this income growth occurring? “
Note that David Wallace-Wells is saying that economic growth in the developing world is the key to adapting to climate change. We need poverty alleviation to help everyone to be able to adapt. Here we agree. Economic growth is the key tool for adapting to climate change. Such economic growth reduces poverty.
Here is a study of global poverty alleviation by a leading macro-economist. I recognize that I am positing that national economic growth reduces poverty. Is this a controversial claim?Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-85616921005314923272022-07-31T07:28:00.003-07:002022-07-31T09:49:46.518-07:00The Interesting Economics Related to the Marginal Cost of Avoiding Heat Exposure<p>This has been a very hot summer. For every person on the planet, what is her willingness to pay to avoid this hot summer? So, on a day when it s 93 degrees on average --- how much is Sally in Seattle willing to pay for this day to have been 78 degrees instead?</p><p>In a "make versus buy" economy, one can either pay God to not face the 93 degree day in Seattle or one can use a suite of adaptation strategies to cope with the high heat. Basic economic logic teaches us that one's willingness to pay to avoid the heat is bounded by what it would cost you to adapt to the heat. This blog post focuses on the microeconomic determinants of adapting to the heat.</p><p>I will argue that at any point in time, this adaptation strategy set is almost infinite dimensional and that the dimensions of the adaptation strategy set grow over time so that it gets ever easier for us to adapt to the high heat. This means that our willingness to pay to avoid facing the extreme heat actually declines over time because it is getting cheaper for us to adapt on our own to the heat. In my <a href="https://books.google.com/books/about/Adapting_to_Climate_Change.html?id=90AWEAAAQBAJ">2021 Adapting to Climate Change book, </a>I expand on this point that the Social Cost of Carbon can actually decline over time for many people as their adaptation choice set grows.</p><p>Let's start with the marginal cost curve that is familiar to anyone who has taken Econ 101.</p><p>Case #1: A firm produces pizza using a linear production function such that pizza=10*Labor and the price of Labor = 2 each.</p><p>Given the linear production function, the firm can always make one more pizza if it hires .1 workers. It costs $2 per worker so the marginal cost to the firm of producing an extra pizza =2*.1 = 20 cents and this is a constant function.</p><p>Case #2: A firm produces pizza using a concave production function such that pizza=10*square root of Labor and the price of labor is .4 each.</p><p>In this case the amount of labor needed to make a pizza can be expressed as = Pizza*Pizza/100 and the $ expenditure to purchase this labor equals Pizza*Pizza/25 . This mechanical marginal cost function is convex.</p><p>Given this definition of <b>marginal cost</b>, now let's turn to the marginal cost of avoiding heat. Consider a person in Spain today confronted with high heat where she currently lives and works. Here is her strategy set for adapting;</p><p>#1 Move to a cooler place (either outdoors or inside such as below ground). Such migration can be permanent or temporary in an economy featuring cross-city transportation services and AirBNB short term housing. </p><p>#2 seek out a shady place with a breeze </p><p>#3 turn on air conditioning or go to a<a href="https://www.dw.com/en/how-can-europe-adapt-to-extreme-heat/a-62472306"> public place with air conditioning</a>, A theme in my 2010 <a href="https://books.google.com/books/about/Climatopolis.html?id=k-qXCQtNiE0C">Climatopolis book</a> was that if an area is known to face rising summer heat then people will change their durables and their home and work place architecture to be better prepared for the heat. We are not passive victims!!</p><p>#4 wear lighter clothing</p><p>#5 use a damp towel</p><p>#6 drink water</p><p>#7 take a Siesta and stop working during the hottest hours</p><p>#8 Eat lightly</p><p>Each of these adaptation strategies has a financial cost and a time cost. As Gary Becker taught us the full price equals the financial cost + your wage*time cost. For example, migrating will require more time and for high value of time people, this will mean incurring a larger cost. </p><p>I will stop here but note the following. Taking permutations of these various options yields an almost infinite dimensional adaptation choice set. Modern climate economics assumes that this choice set is stationary. In truth, it expands on a daily basis as we make progress building higher quality durables such as housing and air conditioning units and as we retire older capital and install newer capital. Modern economics is weak on capital updating problem. John Rust wrote a famous bus engine replacement paper but climate economists haven't incorporated this logic into the updating of the spatial capital stock. My paper with Devin Bunten is one attempt to address this issue.</p><p>Once we acknowledge that we have an ever growing set of adaptation strategies that are becoming cheaper and cheaper to use then one becomes more optimistic about the ability of the rich and the poor to adapt to the new serious challenges we face.</p><p>One example of the rising permutations. More and more educated people now have the opportunity to engage in Work from Home. These individuals can now more easily take a Siesta on a hot day. This is an example of the permutations of the strategy set listed above. </p><p>My critique of modern climate economics is that so many researchers are content to estimate reduced form empirical regressions of the form;</p><p>Person i's suffering on day j in location q = constant + b*Extreme heat on day j in location q + U</p><p>and take "b" as a physics constant. Assume that "suffering" is measured by lost income and that this can be measured by the statistician. </p><p>"b" is an interesting reduced form parameter. It represents a slope that measures at a point in time how much suffering extreme heat has caused to the average person who lives at location q at day j.</p><p><b>My Point </b> is that "b" is determined by all of the factors I discussed above. As society's innovation and urban planning continues; "b" converges to zero over time and this pace of "b" shrinking from a positive number towards zero over time is a measure of our adaptation progress.</p><p>I want to see more climate economists exploring the microeconomic determinants of when does "b" change over time and when does it remain constant. Government policies that distort adaptation decisions such as subsidies will likely turn out to be a major determinant of slowing down adaptation.</p><p>As the marginal costs of climate adaptation decline, simple economics predicts that more individuals and firms will engage in adaptation (as they compare the benefits to the costs of adaptation) and as they engage in such self protection, the empirical reduced form researcher will estimate climate damage functions showing an ever declining amount of damage caused by climate change.</p><p>The Climate Change adaptation literature needs to take basic microeconomic logic about rational choice more seriously and then we will make more progress understanding the pace of adaptation and the frictions that slow down adaptation.</p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p>Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-67651862001883253962022-06-23T06:34:00.003-07:002022-06-23T06:40:57.655-07:00"The Water Cooler" and Spontaneous Face to Face Interaction in a Hybrid-WFH EconomyIs face to face interaction over-rated? I am not talking about participating in the service economy (i.e getting a haircut), romance, friends and family interaction. I am talking about workplace face to face interactions and the vaunted "Water Cooler" (WC). <div><br /></div><div>The cliche WC story has focused on serendipity and spontaneity that occurs when people casually chat about this and that. This is not "directed search". </div><div><br /></div><div>POINT #1; Pessimists claim that the rise of WFH-HYBRID work will tax the Water Cooler such that organizations will become less productive.</div><div><br /></div><div>Counter-Point: The pessimists forget what they learned about self-selection. Workers know themselves, they know when they want to be social and when they want to be left alone. Such workers also respond to incentives. If the boss says; "hey , let's get our creative juices flowing". Workers will respond and be charming and engage on those days.</div><div><br /></div><div>I claim that there is quantity and quality of F2F interactions. The lazy urban economics productivity literature implicitly assumed that F2F interactions are homogeneous and are just a question of their count. So, if you meet with me 1000 times; the probability we have a breakthrough is 10 times higher than if we only meet 100 times face to face. I reject this. Anyone who has met me knows that sharp diminishing returns kick in -- -in speaking with me!</div><div><br /></div><div>POINT #2; The Water Cooler is a pre-AI, pre-UBER entity. I am interested in directed search. UBER matches drivers and riders to achieve efficiency criteria. Why can't successful firms introduce a type of UBER AI matching to bring different workers together? Why can't a boss make some recommendations about such matching?</div><div><br /></div><div>Point #3 Given successful within firm AI matching of Water Cooler Workers, why do they have to meet at work? Is the firm afraid of romance? That would be a funny reason for the persistence of the office!</div><div><br /></div><div>Point #4; Pessimists claim that we will get into a bad Nash Equilibrium such that social workers will go to the office and discover nobody to chat with as everyone else will be engaging in WFH on that day. In this age of AI Matching, can this misallocation really persist?</div><div><br /></div><div><br /></div><div>So, to summarize this blog post; The Quality versus Quantity tradeoff always exists. Organizations have strong incentives to experiment here to see how to maintain their productivity under different organizational rules. How firms adapt to the new opportunity created by WFH is fascinating.</div><div><br /></div><div>FINAL POINT: Note that I set up this blog post such that the spontaneous face to face interactions occur by workers who work at the same firm. In this case, there is a residual claimant who has an incentive to get the rules of engagement right.</div><div><br /></div><div>What happens when workers work at different firms but work in the same city? I doubt that spontaneous F2F is that important for these folks. There isn't that much time in the day. You might say that a Harvard economist and a MIT economist can have coffee and make research magic happen if they both go to work. I accept this example but this is a special example. Do Elon Musk's Tesla engineers hang out at the local bar looking to chat with engineers from other firms? </div><div><br /></div><div>Since urban and labor economists do not have a real understanding of the production function of knowledge firms , we don't understand how the time allocation equilibrium induced by WFH will evolve over time.</div><div><br /></div><div>Of course, I do think that small firms will want to agglomerate close to each other for Labor pooling reasons but this is distinct from the gains from F2F interaction. </div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div><div><br /></div>Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-25764820791531785642022-05-19T14:22:00.003-07:002022-05-19T14:28:28.454-07:00How Will the Rise of WFH Help Us to Adapt to Climate Change? <div style="font-size: 11pt; line-height: 15.6933px; margin: 0px 0px 8pt; text-align: left;"><span style="font-family: times;"><span style="font-size: 11pt;">Millions of American workers engaged in Work from Home (WFH) during the pandemic.</span><span color="inherit" style="border: 0px; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span><span color="inherit" style="border: 0px; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span><span style="font-size: 11pt;">WFH helped us to adapt to the risk of disease contagion.</span><span color="inherit" style="border: 0px; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span><span style="font-size: 11pt;">Going forward, WFH will also helps us to adapt to the rising climate risks we now face.</span><span color="inherit" style="border: 0px; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span><span style="font-size: 11pt;">Given that global greenhouse gas emissions are likely to continue to rise as the world’s population and per-capita income grows faster than the decarbonization of the world economy (declining GHG emissions per dollar of GNP), the climate change challenge will grow more severe over time. <br /></span></span><span style="font-family: times;"><br /></span></div><div style="font-size: 11pt; line-height: 15.6933px; margin: 0px 0px 8pt; text-align: left;"><span style="font-family: times;">New climate risk modelling firms such as <a href="https://theconversation.com/a-new-ratings-industry-is-emerging-to-help-homebuyers-assess-climate-risks-171898">First Street Foundation a</a>nd Jupiter are mapping the risks of flooding and fire risk that every land parcel may face over the next decades. Of course, these science based models cannot offer certainty about emerging risks but they do play a “Paul Revere” role in educating both firms and workers about new place based climate risks. You can type in any residential address here and First Street Foundation reports the property's <a href="https://riskfactor.com/">expected fire risk and flood risk for free!</a> Going forward, more and more property buyers will "do their climate risk homework" before making a large $ investment in a property.<br /></span><span style="font-family: times;"><br /></span></div><div style="font-size: 11pt; line-height: 15.6933px; margin: 0px 0px 8pt; text-align: left;"><span style="font-family: times;">Before 2020, only the super rich and senior citizens were “footloose” and able to move to an area solely based on its amenities (or on its absence of risk).<span color="inherit" style="border: 0px; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span>The rise of WFH allows more and more American workers to live where they want to live as their daily commute to work is no longer looming over where they choose to live. In our recent past, <span color="inherit" style="border: 0px; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span>the expectation that one would commute to work 5 days a week for 48 weeks a year pinned down a worker and her family to specific locations near the corporate headquarters. <br /></span><span style="font-family: times;"><br /></span></div><div style="font-size: 11pt; line-height: 15.6933px; margin: 0px 0px 8pt; text-align: left;"><span style="font-family: times;">Perceptions and concerns about emerging climate risks will influence where workers choose to live. Those who are risk lovers will actually be attracted to risky areas because property prices will be lower there! For those WFH eligible workers who are risk averse, their menu of locational choices will expand as they can live further from where they work. </span></div><div style="font-size: 11pt; line-height: 15.6933px; margin: 0px 0px 8pt; text-align: left;"><span style="font-family: times;">While no two WFH workers are identical,<span color="inherit" style="border: 0px; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span>climate change will influence their locational choices.<span color="inherit" style="border: 0px; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span>For those WFH workers who are especially sensitive to air pollution, they will anticipate that elevated fire risk in the American West will create PM2.5 spikes during summer months.<span color="inherit" style="border: 0px; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span>They will figure out how to avoid these areas at those times.<span color="inherit" style="border: 0px; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span>For those WFH workers who are especially risk averse, they will be willing to pay more for housing in places where climate risk modelers predict that they face less risk.<span color="inherit" style="border: 0px; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span><span color="inherit" style="border: 0px; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span>Those WFH workers with niche preferences for leisure and exercise will have increased opportunity to live where they can engage in their hobby and meet like minded people. <br /></span><span style="font-family: times;"><br /></span></div><div style="font-size: 11pt; line-height: 15.6933px; margin: 0px 0px 8pt; text-align: left;"><span style="font-family: times;">As different workers choose their own best “climate niche”, this will improve <a href="https://healthpolicy.usc.edu/evidence-base/will-the-rise-of-work-from-home-improve-our-health/">their mental and physical health </a>and raise their workplace productivity.<span color="inherit" style="border: 0px; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span>Surveys of young people have documented extreme ecological anxiety.<span color="inherit" style="border: 0px; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span>The ability to choose one’s own favorite location that will be likely to attract like minded people will help them to better cope in the face of the new risks we face. <br /></span><span style="font-family: times;"><br /></span></div><div style="font-size: 11pt; line-height: 15.6933px; margin: 0px 0px 8pt; text-align: left;"><span style="font-family: times;">If WFH workers choose to cluster in relatively safer parts of the U.S that feature less extreme heat, less drought risk, less flood and fire risk then firms will have an incentive to locate their future HQ2s and HQ3s closer to these areas. </span><span style="font-family: times; font-size: 11pt;">Firms will benefit from lower turnover from less burnout and greater worker satisfaction.</span><span color="inherit" style="border: 0px; font-family: times; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span><span style="font-family: times; font-size: 11pt;">Firms that expect that workers will stay with the firm longer have a greater incentive to mentor and invest in such workers.</span><span color="inherit" style="border: 0px; font-family: times; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span><span style="font-family: times; font-size: 11pt;"> </span><span style="font-family: times; font-size: 11pt;">Firms will use their corporate data on the location of their workforce and can use this information to decide where to open up HQ2s and HQ3s.</span><span color="inherit" style="border: 0px; font-family: times; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span><span color="inherit" style="border: 0px; font-family: times; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span><span style="font-family: times; font-size: 11pt;">An old idea in urban economics focuses on the “chicken and egg” issue of whether people go where the jobs are or whether jobs move to where the people are.</span><span color="inherit" style="border: 0px; font-family: times; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span><span style="font-family: times; font-size: 11pt;">In our emerging economy where more WFH are footloose, they will increasingly take into account the emerging climate risks and move to relatively higher quality of life areas.</span><span color="inherit" style="border: 0px; font-family: times; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span><span style="font-family: times; font-size: 11pt;">As firms see these spatial clusters, the leadership can open up HQ2s closer to these worker hubs to increase face to face interaction and to buildup the company’s corporate culture. </span></div><div style="font-size: 11pt; line-height: 15.6933px; margin: 0px 0px 8pt; text-align: left;">Some worry that the rise of WFH is elitist. As new WFH clusters form in climate resilient places, there will be an increased local service sector demand. This creates a local multiplier effect. Well paid WFH workers will need local teachers living nearby, dentists, repair people, and there will be jobs in construction. This increased local labor demand in a relatively high quality of life area featuring lower rents than in the Superstar Cities offers new opportunities for non-WFH eligible workers.</div><div style="font-size: 11pt; line-height: 15.6933px; margin: 0px 0px 8pt; text-align: left;"><span style="font-family: times; font-size: 14.6667px;">Today, more educated people are more likely to work in industries and occupations that are WFH “friendly”.</span><span color="inherit" style="border: 0px; font-family: times; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span><span color="inherit" style="border: 0px; font-family: times; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span><span style="font-family: times; font-size: 14.6667px;">If WFH facilitates adapting to climate change and facing less climate risk, then this creates an extra imperative for improving American education so that more young people can have the option to engage in WFH when they are older. </span></div><div style="font-size: 11pt; line-height: 15.6933px; margin: 0px 0px 8pt; text-align: left;"><span style="font-family: times; font-size: 11pt;">Before 2020, America’s most productive places were located in areas that face emerging risks.</span><span color="inherit" style="border: 0px; font-family: times; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span><span style="font-family: times; font-size: 11pt;">There are worries about flooding in New York City and wildfire risk affecting the American West.</span><span color="inherit" style="border: 0px; font-family: times; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span><span style="font-family: times; font-size: 11pt;">WFH accommodates our diversity.</span><span color="inherit" style="border: 0px; font-family: times; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span><span color="inherit" style="border: 0px; font-family: times; font-size: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span><span style="font-family: times; font-size: 11pt;">Millions of workers will have the personal freedom to live where they want to live and this will reduce their stress during a time of rising risk. </span></div><div style="font-size: 11pt; line-height: 15.6933px; margin: 0px 0px 8pt; text-align: left;"><span style="font-family: times;"><br /></span></div><div style="font-size: 11pt; line-height: 15.6933px; margin: 0px 0px 8pt; text-align: left;"><span style="font-family: times;"><a href="http://mek1966.googlepages.com">Matthew E. Kahn </a>is the Provost Professor of Economics at USC and the author of the New Book <a href="https://www.amazon.com/Going-Remote-Flexible-Economy-Improve/dp/0520384318">Going Remote.</a> This piece presents some ideas from his new book. </span></div><div style="font-size: 11pt; line-height: 15.6933px; margin: 0px 0px 8pt; text-align: left;"><span style="font-family: times;"><br /></span></div><div style="font-size: 11pt; line-height: 15.6933px; margin: 0px 0px 8pt; text-align: left;"><span style="font-family: times;">A Postscript: Back in 2016, a prominent University of Chicago economist (who does not have a PHD from Chicago!) told me that snowstorms disrupt Chicago's productivity. I countered that I bet that he is even more productive on those days because he didn't go to work and nobody bugged him on such a day. He just looked at me. Flash forward to 2022 and I am even more confident about my 2016 comment. The WFH option is now available to more and more highly educated people and they can "reoptimize" when a day turns out to be nasty to still be able to "seize the day" and get work done. Of course a snowstorm can disrupt a dentist appointment but for more and more of the key tasks in the modern economy, these can be done "anywhere" and a footloose population will each make decentralized decisions for how to make the best of that day before the weather goes back to normal. The reduced form empirical researcher then observes that the same Chicago snowstorm causes less economic damage and this is the empirical benchmark test that adaptation is taking place! Mother Nature's punches cause less damage over time in an economy enjoying adaptation progress. </span></div><div style="font-size: 11pt; line-height: 15.6933px; margin: 0px 0px 8pt; text-align: left;"><br /></div><div style="font-size: 11pt; line-height: 15.6933px; margin: 0px 0px 8pt; text-align: left;"><br /></div><div style="font-size: 11pt; line-height: 15.6933px; margin: 0px 0px 8pt; text-align: left;"><br /></div>Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-38063941218580155932022-05-19T09:19:00.002-07:002022-05-19T09:19:51.728-07:00USC Economics Faculty Hiring Since 2015<p> I joined the USC Economics faculty in 2015 and Romain Ranciere also joined that year. Permit me to list the impressive scholars who have subsequently joined our faculty.</p><p><a href="https://dornsife.usc.edu/cf/econ/econ_faculty_display.cfm?Person_ID=1096921">Marianne Andries </a></p><p><a href="https://dornsife.usc.edu/cf/econ/econ_faculty_display.cfm?Person_ID=1101874">Tim Armstrong</a></p><p><a href="https://dornsife.usc.edu/cf/econ/econ_faculty_display.cfm?Person_ID=1080512">Vittorio Bassi</a></p><p><a href="https://dornsife.usc.edu/cf/econ/econ_faculty_display.cfm?Person_ID=1104609">Augustin Bergeron</a></p><p><a href="https://dornsife.usc.edu/cf/econ/econ_faculty_display.cfm?Person_ID=1074793">Fanny Camara </a></p><p><a href="https://dornsife.usc.edu/cf/econ/econ_faculty_display.cfm?Person_ID=1096922">Thomas Chaney</a><br /></p><p><a href="https://dornsife.usc.edu/cf/econ/econ_faculty_display.cfm?Person_ID=1087126">Pablo Kurlat</a></p><p><a href="https://dornsife.usc.edu/cf/econ/econ_faculty_display.cfm?Person_ID=1085764">Jonathan Libgober</a></p><p><a href="https://dornsife.usc.edu/cf/econ/econ_faculty_display.cfm?Person_ID=1097012">Robert Metcalfe</a></p><p><a href="https://dornsife.usc.edu/cf/econ/econ_faculty_display.cfm?Person_ID=1085411">Monica Morlacco</a></p><p><a href="https://dornsife.usc.edu/cf/econ/econ_faculty_display.cfm?Person_ID=1085525">Afshin Nikzad </a></p><p><a href="https://dornsife.usc.edu/cf/econ/econ_faculty_display.cfm?Person_ID=1081360">Paulina Oliva</a></p><p><a href="https://dornsife.usc.edu/cf/econ/econ_faculty_display.cfm?Person_ID=1103954">Simon Quah </a></p><p><a href="https://dornsife.usc.edu/cf/econ/econ_faculty_display.cfm?Person_ID=1080376">Jeffrey Weaver </a></p><p><a href="https://dornsife.usc.edu/cf/econ/econ_faculty_display.cfm?Person_ID=1074690">David Zeke</a></p><p>In July 2022, a star theorist will join our department as our newest hire.</p><p>USC fascinates many people. This list highlights that the hype about us is earned. Note that we continue to build up strength in micro theory, macro, econometrics and applied micro. A balanced, optimistic department. </p><p>The next piece of the jigsaw puzzle is to build up a PHD program that trains and places students to achieve their career goals. </p>Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-76002266332373756682022-05-06T07:53:00.002-07:002022-05-06T07:53:21.931-07:00The New New Geography of Jobs<p>The Los Angeles Times rejected my piece that I present below. Of course, I'm trying to sell my new <a href="https://books.google.com/books/about/Going_Remote.html?id=U-uizgEACAAJ">2022 Going Remote book!!</a></p><p> </p><p dir="ltr" style="line-height: 1.38; margin-bottom: 0px; margin-top: 0px;"><span data-ogsc="black" style="border: 0px; color: black !important; font-family: Arial; font-size: 11pt; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: 400; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">The New New Geography of Jobs</span></p><p dir="ltr" style="line-height: 1.38; margin-bottom: 0px; margin-top: 0px;"><span data-ogsc="black" style="border: 0px; color: black !important; font-family: Arial; font-size: 11pt; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: 400; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><br /></span></p><p dir="ltr" style="line-height: 1.38; margin-bottom: 0px; margin-top: 0px;"><span data-ogsc="black" style="border: 0px; color: black !important; font-family: Arial; font-size: 11pt; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: 400; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">LeBron James joined the Los Angeles Lakers in 2018. He wanted to live and work in Los Angeles. How many of us have compromised as we live in a place because our work is nearby? </span></p><p><span style="font-family: Arial; font-size: 11pt; font-style: inherit; font-variant-caps: inherit; font-variant-ligatures: inherit;">Going forward, a silver lining of the pandemic is that more and more of us will have the option to live where we want to live as we engage in WFH on either a part-time or full time basis. How will this new freedom affect our quality of life?</span></p><p><span style="font-family: Arial; font-size: 11pt; font-style: inherit; font-variant-caps: inherit; font-variant-ligatures: inherit;">More educated workers are more likely to be working in occupations and industries that are WFH “friendly”. While a surgeon cannot work from home, a book author can. More and more people have learned due to our experience we gained from the COVID lockdown that we can be quite productive while working at home.</span></p><p><b style="-webkit-text-stroke-width: 0px; color: black; font-family: Calibri, Arial, Helvetica, sans-serif; font-size: 16px; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal; letter-spacing: normal; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; text-decoration-thickness: initial; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"><br aria-hidden="true" /></b></p><p dir="ltr" style="line-height: 1.38; margin-bottom: 0px; margin-top: 0px;"><span data-ogsc="black" style="border: 0px; color: black !important; font-family: Arial; font-size: 11pt; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: 400; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">WFH workers reduce their weekly commute time. The rise of WFH allows for staggered work hours removing many peak commuters off the roads. The typical WFH worker saves perhaps 5 hours a week in commute time. Will traffic speeds increase for everyone else? This depends on whether more drivers take non-work related trips when road speeds increase. </span></p><p><b style="-webkit-text-stroke-width: 0px; color: black; font-family: Calibri, Arial, Helvetica, sans-serif; font-size: 16px; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal; letter-spacing: normal; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; text-decoration-thickness: initial; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"><br aria-hidden="true" /></b></p><p dir="ltr" style="line-height: 1.38; margin-bottom: 0px; margin-top: 0px;"><span data-ogsc="black" style="border: 0px; color: black !important; font-family: Arial; font-size: 11pt; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: 400; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">WFH workers will have increased freedom in their lives to exercise more, to spend more time with children, to participate in family chores and to co-ordinate their leisure time with their nearby neighbors and friends. This opens up the possibility of new civic engagement. On days when a child is sick or bad weather days, the WFH worker can be productive and caring while at home. This opportunity reduces one’s stress and improves one’s mental health.</span></p><p><b style="-webkit-text-stroke-width: 0px; color: black; font-family: Calibri, Arial, Helvetica, sans-serif; font-size: 16px; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal; letter-spacing: normal; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; text-decoration-thickness: initial; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"><br aria-hidden="true" /></b></p><p dir="ltr" style="line-height: 1.38; margin-bottom: 0px; margin-top: 0px;"><span data-ogsc="black" style="border: 0px; color: black !important; font-family: Arial; font-size: 11pt; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: 400; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">In 2021 and 2022, economists have used U.S Postal Service change of address data to study migration patterns. We are already spreading out. People have been moving to the exurbs and bidding up home prices there. People will move to areas where they want to be now that they are “untethered” and can live where they want to live. People who love to ski will move to such areas. Those with an aging mother may move closer to her without facing the same labor market penalty as before the rise of WFH. The ability to seek out cheaper housing will allow families to achieve their goals. One economic study argued that when people live in larger housing that this causes them to have more children!</span></p><p><b style="-webkit-text-stroke-width: 0px; color: black; font-family: Calibri, Arial, Helvetica, sans-serif; font-size: 16px; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal; letter-spacing: normal; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; text-decoration-thickness: initial; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"><br aria-hidden="true" /></b></p><p dir="ltr" style="line-height: 1.38; margin-bottom: 0px; margin-top: 0px;"><span data-ogsc="black" style="border: 0px; color: black !important; font-family: Arial; font-size: 11pt; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: 400; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">During this time of deep concern about inequality, will WFH be elitist such that those who are not WFH eligible will be left behind and housing will become unaffordable in areas far from the cities? While these are open questions, economic logic offers several insights. First, with the rise of new WFH communities, there will be a local demand for the service economy as construction workers, teachers and restaurants will be in demand. For those non-WFH workers with a taste for the area’s lifestyle, new opportunities will emerge. Second, home prices do not have to soar in the medium term if real estate developers are allowed to build new housing in these places that have plenty of land. American’s NIMBYism could be a key constraint on how the rise of WFH affects our nations’ geography.</span></p><p><b style="-webkit-text-stroke-width: 0px; color: black; font-family: Calibri, Arial, Helvetica, sans-serif; font-size: 16px; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal; letter-spacing: normal; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; text-decoration-thickness: initial; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"><br aria-hidden="true" /></b></p><p dir="ltr" style="line-height: 1.38; margin-bottom: 0px; margin-top: 0px;"><span data-ogsc="black" style="border: 0px; color: black !important; font-family: Arial; font-size: 11pt; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: 400; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">Consider California. Our state is suffering from drought right now and features extremely high home prices. Farmers consume over 75% of the state’s water. If some farmland could be rezoned as suburban housing, then water consumption would decrease and the supply of affordable housing would increase as that land is converted into housing. The rise of WFH helps our state to adapt to climate change and to increase the supply of affordable housing!</span></p><p><b style="-webkit-text-stroke-width: 0px; color: black; font-family: Calibri, Arial, Helvetica, sans-serif; font-size: 16px; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal; letter-spacing: normal; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; text-decoration-thickness: initial; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"><br aria-hidden="true" /></b></p><p dir="ltr" style="line-height: 1.38; margin-bottom: 0px; margin-top: 0px;"><span data-ogsc="black" style="border: 0px; color: black !important; font-family: Arial; font-size: 11pt; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: 400; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">Third, our cities feature many durable buildings. If many WFH workers “head for the hills”, this opens up new possibilities for those who want to live in a San Francisco or a Boston to find housing there. This possibility only grows if commercial real estate in these areas is converted into residential buildings.</span></p><p><b style="-webkit-text-stroke-width: 0px; color: black; font-family: Calibri, Arial, Helvetica, sans-serif; font-size: 16px; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal; letter-spacing: normal; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; text-decoration-thickness: initial; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"><br aria-hidden="true" /></b></p><p dir="ltr" style="line-height: 1.38; margin-bottom: 0px; margin-top: 0px;"><span data-ogsc="black" style="border: 0px; color: black !important; font-family: Arial; font-size: 11pt; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: 400; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">In the medium term, the rise of WFH opens new opportunities for parents of young children. In the past, many women opted out of the workforce to raise children. WFH opens up the possibility of working part-time for one’s firm while the kids are young. A firm that anticipates this dynamic will continue to mentor such young female workers and this will close the gender earnings gap. In the past, women disproportionately entered fields such as being a pharmacist because of the job’s flexibility. WFH opens up the possibility of more flexibility and thus accommodates our diversity. </span></p><p><b style="-webkit-text-stroke-width: 0px; color: black; font-family: Calibri, Arial, Helvetica, sans-serif; font-size: 16px; font-style: normal; font-variant-caps: normal; font-variant-ligatures: normal; font-weight: normal; letter-spacing: normal; orphans: 2; text-align: start; text-decoration-color: initial; text-decoration-style: initial; text-decoration-thickness: initial; text-indent: 0px; text-transform: none; white-space: normal; widows: 2; word-spacing: 0px;"><br aria-hidden="true" /></b></p><p dir="ltr" style="line-height: 1.38; margin-bottom: 0px; margin-top: 0px;"><span data-ogsc="black" style="border: 0px; color: black !important; font-family: Arial; font-size: 11pt; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: 400; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">In the past, African Americans were under-represented in the Tech Sector. Relatively few African-Americans live in tech cities such as San Francisco and Seattle. Few tech companies have headquarters in Baltimore or Detroit. The rise of WFH raises the possibility of the “best of both worlds”. One can live in Baltimore and work and physically appear from time to time at Amazon HQ2 or a future HQ3. Such tech firms will be able to attract a more diverse workforce and depressed cities such as Baltimore will attract role models who boost the local tax base. </span></p><p><span style="font-family: Calibri, Arial, Helvetica, sans-serif; font-size: 16px;"><br aria-hidden="true" /><span data-ogsb="white" data-ogsc="black" style="background-color: white !important; border: 0px; font-family: Roboto, sans-serif; font-size: 11.5pt; font-stretch: inherit; font-style: inherit; font-variant: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">A “New” New Geography of Jobs is now emerging. Those firms that recognize this point will build a stronger, more diverse and more loyal workforce. Those places that compete to attract such workers will enjoy growth and an influx of new blood.’. </span><span data-ogsc="black" style="border: 0px; font-family: Arial; font-size: 11pt; font-stretch: inherit; font-style: inherit; font-variant: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">A stronger America emerges as people can live where they want to live and change their schedules to meet their goals and responsibilities. </span></span></p>Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-27838006577325253512022-04-24T07:50:00.001-07:002022-04-24T07:56:20.670-07:00Connecting the Dots: The Common Themes Between My Three Recent Books <p>Tomorrow, the University of California Press will publish<a href="https://www.amazon.com/gp/product/B09T9DXBHL/ref=dbs_a_def_rwt_bibl_vppi_i0"> my Going Remote book. </a> In February 2021, Johns Hopkins Press published my Co-authored "<a href="https://www.amazon.com/gp/product/B08FF3X8TT/ref=dbs_a_def_rwt_bibl_vppi_i4">Unlocking the Potential of Post-Industrial Cities" </a>and in March 2021, Yale University Press published my book; "<a href="https://www.amazon.com/gp/product/B08TKM9XDX/ref=dbs_a_def_rwt_bibl_vppi_i2">Adapting to Climate Change".</a></p><p>Why did I write these 600 total pages of stuff?</p><p><b>The Ongoing Challenge faced by Baltimore, Cleveland and Detroit</b></p><p>I spent two years working at Johns Hopkins University and I lived in downtown Baltimore for a year before the pandemic hit. I wrote the Unlocking book because I recognized that I was living in a city that was stuck in a poverty trap. Very few people were actively thinking about the basic building blocks of economic growth namely attracting productive firms, encouraging private capital investment in firms, and upgrading old durable real estate capital. Young people were not investing in their skills because there were few local private sector jobs. The basics of building a high quality of life city focused on improving school quality and safe streets and clean air and clean water were not being fully addressed as Baltimore's officials showed little interest in experimentation and formal evaluation of different program's effectiveness. </p><p><b>Adapting to Climate Change</b></p><p>My book is an optimistic study as I synthesize what I have learned over my 15 years of researching and reading the climate change economics adaptation literature. </p><p>Name any climate change challenge you can think of ranging from sea level rise, to extreme heat, to increased fire risk and I discuss how capitalism helps us to adapt to the challenge. For capitalism to help us to adapt, prices must be allowed to signal scarcity. If drought occurs, water prices must rise. If real estate in a specific location faces new risk, then the price will decline and the new buyer will be a person with an edge in adapting to the risk. Such an edge can be built up through developing skill or if there is sufficient demand to protect properties that can flood then it becomes profitable for firms to enter the "flood protection" business to protect such home owners. As we learned from the development of the COVID vaccine, our economy features amazing adaptation potential.</p><p>Climate adaptation optimism is still viewed as politically incorrect stuff. Why? Through rising incomes, access to markets and rising educational attainment, our ability to adapt to new shocks increases every day. </p><p><b>Going Remote</b></p><p>This is a book about the urban and environmental implications of the persistence of WFH in a post-COVID economy. I argue that the "experience good" effect that we enjoyed during COVID will offer huge medium term gains for our quality of life going forward.</p><p>Cities such as Baltimore will experience an influx of WFH workers as people who want to live in that city because they desire its affordable housing and culture and lifestyle can now live and have a good job as they work for a Amazon HQ2 or HQ3 of Google in a 2 hour drive in some direction. The unbundling of where we live from where we work will help cities that have failed to attract modern companies to make a comeback if they offer good services and good quality of life. If a Baltimore attracts more talent to live there, then this will stabilize the taxbase and increase the demand for the local Consumer City. This will create a service sector multiplier effect and increase opportunities for those workers who are not WFH eligible. As young people foresee that they can be WFH workers if they have the skills, they will invest more in themselves and their parents will seek better schools for them. This will put pressure on the local public sector unions to teach!</p><p>So, there is a clear link between my Unlocking book and the Going Remote book.</p><p>The link to climate change adaptation is that a WFH eligible workforce can spread out. For those who seek to work for a Seattle firm but fear how climate change will impact Seattle, they are free to choose and "head for the hills". The permutations become huge when you can work for one firm and live elsewhere. Milton Friedman's "Free to Choose" becomes a more accurate description of our economy and this increases our wellbeing.</p><p>In 2019, the great jobs were in congested, expensive Superstar cities that faced increased climate risks. WFH unbundles where we live from where we work and opens up many, many possibilities for how we configure our lives. This represents a significant real pay raise!</p><p>I am not a modest man. I view my three books as creating a series of empirical predictions for how the urban system of cities will unfold over the next decades. I would hope that my teacher Sherwin Rosen would respect how I have taken his hedonic equilibrium ideas and built on his edifice. </p><p><br /></p><p><br /></p><p><br /></p>Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-14728913381461469902022-04-11T06:22:00.003-07:002022-04-11T06:32:08.841-07:00The Simple Microeconomics of Adapting to Real Estate Damage Caused by Flooding<p> The New York Times has publishe<a href="https://www.nytimes.com/2022/04/11/opinion/climate-change-flooding.html">d a good opinion piece </a>by a Professor of English on the unintended consequences of federal subsidies and regulations for living in flood plains.</p><p>In this brief piece, I am not talking about surviving a flood. Instead, I will discuss how flood risk (ex-ante) and flooding affects the real estate market and the distribution of income. In an increasingly risky economy, who should own the risky assets?</p><p>When one owns an asset, there is uncertainty about how the price of the asset will change over time. A share of Tesla can either rise or fall over time. A home's value can go up or down over time. The asset's owner is not guaranteed that "nothing bad" will ever happen to the home. Under the logic of the efficient markets hypothesis, expected future risks to a specific property will be reflected in the value of the asset today.</p><p>For example, if crime is expected to rise in the year 2024 in a Los Angeles neighborhood because the police have announced that they will no longer patrol there --- economics predicts that home prices for such homes in April 2022 in these areas will decline now to compensate buyers for the emerging risks as crime rises. Those who buy the homes today are "adults" and know what risks they are taking on. Economics predicts that self-selection will arise. Those with an edge at defending themselves (so think of Clint Eastwood or Bruce Lee or the Terminator) will be more likely to buy these homes due to comparative advantage in self-defense. A home buyer can buy one of these discount homes and install security cameras and use a private car to drive one around to avoid contact with potential robbers.</p><p>This same logic applies in flood zones. Professor Rush gives some quotes of home owners who are frustrated that the value of their home has declined because of increased flooding. Are they victims who the rest of society should subsidize? These individuals chose to own when the opportunity cost is that they could have rented and held a more diversified portfolio. Most poor people are not home owners. This means that middle class and richer people own these at risk to flood homes are they really the "vulnerable" people who deserve federal handouts for choices they voluntarily made?</p><p>I think the answer is no for several reasons. First, none of us flip "one sided coins". If their homes had tripled in value, they would not have given 50% of their equity gain back to us. These home buyers want to keep their capital gains and nationalize any losses. This subsidy of risk taking creates moral hazard effects. </p><p>These home owners could have sold their homes previously and rented in the same area to reduce their risk exposure and to keep their social network and commute. These home owners can <a href="https://www.cnbc.com/2019/04/05/need-cash-now-you-can-sell-the-equity-in-your-home-to-investors.html">sell housing equity in their home to outside investors to diversify their portfolio. </a> If home owners do not engage in any of these risk diversification strategies, are they victims?</p><p>Note that up until now I have focused on the incumbent property owners who are increasingly aware of the flood risk they face both from their past experience and because of new entities such as First Street F<a href="https://www.googleadservices.com/pagead/aclk?sa=L&ai=DChcSEwiXpZrviYz3AhWCCecKHb0UAzsYABAAGgJwdg&ae=2&ohost=www.google.com&cid=CAESWOD2kcSi8VovHmwcC9nfEXZOd2CcV_jn0nzwMBb29PvHGOSMVBcCykUBqFnCn3b91vFJubCzo987vLXs3lP4X16kVLyHiywlKqFDZQIC2RWz-mnw9jEDEy0&sig=AOD64_0779SFH9vfqYvHih4PwtbObJ99vg&q&adurl&ved=2ahUKEwj094_viYz3AhVFD0QIHZulAMkQ0Qx6BAgCEAE">oundation's Flood Score.</a></p><p>As I argue in my <a href="https://www.google.com/books/edition/Adapting_to_Climate_Change/uaUhEAAAQBAJ?hl=en&gbpv=1&printsec=frontcover">2021 Yale University Press book Adapting to Climate Change, </a>we will be better able to adapt to flood risk if society agrees on evolving flood risk maps such as First Street's that show property by property the expected risk. Banks and insurers should be allowed to risk price based on these such that riskier properties face higher interest rates, lower loan to value ratios and higher insurance premiums. Home buyers who are quoted these interest rates and insurance premiums will quickly figure out that the property is risky and these Bayesians will update their beliefs and bid less for the home. The owner of the home will receive a lower sales price for the "common knowledge" that the home is riskier due to climate change. </p><p>The Banks and Insurers will act as the "adults in the room" nudging real estate buyers to reduce their demand in risky places and increase their demand for housing and real estate in safer places. If we change our zoning codes to up zone in safer places featuring less fire risk, flood risk and extreme heat then a more elastic housing supply curve emerges there and prices of real estate will reflect demand and increased supply. Worries about climate gentrification on higher ground will be muted.</p><p>Will flood zones be emptied out? No, I predict that in beautiful and productive locations that happen to be flood zones, single family homes that are adjacent to each other will be purchased and knocked down. They will be replaced with wetlands and tall buildings that have empty lower floors to reduce building damage. Civil Engineers will figure out how to have productive real estate assets that are acclimated to the risks.</p><p>The key to this smooth adaptation dynamic is for government to retreat. Government is taxing people on higher ground to subsidize people taking risks. Why is that fair? Mancur Olsen asymmetric interest group logic can explain this political equilibrium but I believe that reforms will occur as tax payers realize the size of the subsidies we are paying to the risk takers.</p><p>The next steps in the climate change adaptation research agenda is to focus on induced innovation. As more home owners face flood risk, this creates a demand for solutions and this creates profit opportunities for innovations that offset this damage. Do you doubt that capitalism will deliver here?</p><p>Finally, note that at no time in this piece did I discuss major engineering projects. Such projects can protect an area from flood risk but I argue in my 2021 book that they should be funded locally. Such projects protect local land and home owners own those and thus should pay for their own defenses. The central government can provide the expertise and human capital but local public goods should be funded locally.</p><p>One More Point! Those who cry that climate change is lowering the value of homes in areas that now face flood risk ignore that there are other homes on "higher ground" whose values rise because they are relatively safer. It is an exaggeration to call this a "zero sum game" but even good economists ignore this cross-elasticity point. General equilibrium effects always exist. </p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p>Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-60042257702091071012022-04-02T07:51:00.004-07:002022-04-02T08:09:47.189-07:00The Role of Qualitative Data in Academic Field Experiment Research<p>This will be a "big think" blog post that shares my thinking about this March 2022 Nature Human Behavior paper titled "<a href="https://www.nature.com/articles/s41562-022-01333-7.epdf?sharing_token=Mwvtn9trln9eDeC5YlJCBdRgN0jAjWel9jnR3ZoTv0OkNcGEML9XDaazgrJRKzQD6OqYvcHpP4jx2BKsWWw_tFx90eDMtLZPGD6qNFVqbi0RrSgYlcbpF-9wbZbWwiUi9RSIDN_ZhYGqPvomkPJlMLkFPvauQUNbX-lrPlhz9yI%3D">The data revolution in social science needs qualitative research"</a>.</p><p>Permit me to focus on one example. Consider a sample of 5,000 equally talented and ambitious 18 year olds. Each has graduated from High School and each is considering applying to the University of California. The students differ that some are Asian and some are Hispanic. To simplify, let's assume everyone is a member of one of these two groups. </p><p>The researcher observes that 72% of Asians 18 year olds in the sample apply to the University of California while only 32% of Hispanic 18 year olds in the sample do.</p><p><b>A qualitative researcher</b> would take the next step of interviewing a random subset of the Asians and the Hispanics in this sample to ask them various questions about their beliefs, life goals, family circumstances and several other nuances that cannot be captured by a standard demographic survey.</p><p><b>A field experiment researcher</b> would proceed with a different strategy. She would take a new sample of 5,000 equally talented and ambitious 18 year old Hispanic and Asian students in the next year and randomly assign a subset of each group to a specific treatment such as a 20 minute information course on understanding the application process to the University of California and the gains to attending an elite 4 year college. The control group would not receive any of this information</p><p>The field experiment researcher would observe the following pieces of information;</p><p>X1 = percentage of Asians who apply to the University of California given random assignment to the treatment group.</p><p>X2 = percentage of Asians who apply to the University of California given random assignment to the control group.</p><p>X3 = percentage of Hispanics who apply to the University of California given random assignment to the treatment group.</p><p>X4 = percentage of Hispanics who apply to the University of California given random assignment to the control group.</p><p>Suppose for this new sample of young people that the researcher observes the following facts;</p><p>X1 = 74%</p><p>X2 = 72%</p><p>X3 = 70%</p><p>X4 = 32%</p><p>These data immediately indicate that the intervention had a much larger impact on the Hispanic teens than on the Asian teens. The intervention closed the gap.</p><p><b>What is My Point?</b></p><p>I am interested in asymmetries in social science. Economists assume that people know themselves and have a life plan and a "conception of the good life" and they strategically make their choices such as who they marry, where they live and how much education to attain with their plan's goals in mind. The observer knows that she does not know what is each person's life goal. Social scientists learn about people based on the choices we observe them make.</p><p>In the example sketched out above, a field experiment researcher seeks to explain the "education gap" and to test for what might be cost-effective strategies for closing this gap. How did the field experiment researcher choose the specific intervention that turned out to be effective?</p><p>One answer is introspection. Another answer is the researcher has read journalistic accounts explaining why some talented teens do not apply to great schools. Another answer is that the field experiment researcher has engaged in her own qualitative research to list out the menu of possible explanations for the education gap. </p><p>The question here pertains to how quickly will the Big Data researcher zero in on the right treatment to pilot? If the Big Data field experiment researcher is baffled concerning what treatment to pilot, then qualitative research is crucial for narrowing down the set of strategies. </p><p>Given the publication incentives of academic researchers and given their finite research budgets, they have strong incentives to pursue treatment effect designs that are effective. Researchers cannot publish papers that say; "I tried this crazed treatment and it turned out to have no effect.". The self doubt of the field experiment researcher leads her to pursue qualitative strategies (at least on a small sample) to reduce her risk exposure of investing her time and $ in a project that doesn't yield credible statistically significant results.</p><p><b><br /></b></p><p><b>"Dynamic" Facts in the Social Science</b></p><p>Note that the effective intervention means that the "Old fact" (that eligible Asians are much more likely to apply to the great colleges than eligible Hispanics) is no longer a fact going forward as the effective intervention brings about convergence. In Physics, this does not occur. </p><p><br /></p><p><b>Final Point and a New Thought</b></p><p>When the field experiment researcher knows that she does not know the causes of behavior (so in this case why Hispanics are not often applying to the UCs), she has an incentive to invest in qualitative research to help hone the actual treatment. </p><p>In the example I have sketched above for both Hispanic and Asian teens in the treatment group (so they received the information session) who both choose to apply to the UC and not apply , I would find it interesting to interview a subset of them. There is a jump from the "intention to treat" to "treatment status" and I don't think we understand what types of personalities and under what circumstances are people eager to play along and try something new. </p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p>Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-39719020519122161712022-03-31T06:52:00.017-07:002022-07-14T06:28:41.645-07:00My Growing Set of Podcasts Discussing my April 2022 Going Remote book<p> While I don't write best selling books, I do like my books! Amazon se<a href="https://www.amazon.com/Matthew-E.-Kahn/e/B001JSDZTK%3Fref=dbs_a_mng_rwt_scns_share">lls them here.</a> In April 2022, my <a href="https://books.google.com/books/about/Going_Remote.html?id=U-uizgEACAAJ">Going Remote book </a>was published. This book studies the urban and labor economic issues related to persistent Work from Home (or work from anywhere) going forward. Below, I post a growing set of podcasts and videos where I discuss my book.</p><p><a href="https://www.ivoox.com/n4l-184-going-remote-by-matthew-e-kahn-audios-mp3_rf_84921759_1.html">Podcast #1</a></p><p><a href="https://www.ijpr.org/show/the-jefferson-exchange/2022-02-28/wed-9-am-how-working-from-home-changes-home-and-work-and-more">Podcast #2</a></p><p><a href="https://www.iheart.com/podcast/1069-the-mark-thompson-show-po-53782977/episode/mark-thompson-how-working-from-home-94768041/?cmp=web_share&embed=true">Podcast #3</a></p><p><a href="https://urldefense.com/v3/__https://player.fm/series/jim-bohannon-1943237/jim-bohannon-04-05-22__;!!LIr3w8kk_Xxm!61BKKzATkXmSnSYtq8oUWqXHFgM_WvZ3j7O8hgxo3qP1fHECogUD8jZaI4ai3w$">Podcast #4</a></p><p><a href="https://www.ivoox.com/en/matthew-e-kahn-why-going-remote-at-work-audios-mp3_rf_85785838_1.html">Podcast #5</a></p><p><a href="https://podcasts.apple.com/us/podcast/planned-parenthoods-emily-wales-and-urban-economist/id1485475085?i=1000558100359">Podcast #6</a></p><p><a href="https://www.wclo.com/episode/4-22-22-author-of-the-book-going-remote-matt-kahn/">Podcast #7</a></p><p><a href="https://alainguillotshow.libsyn.com/518-matthew-e-kahn-how-working-remote-improves-our-lives">Podcast #8</a></p><p><a href="https://www.kfai.org/podcast/write-on-radio-matthew-kahn-legacy/">Podcast #9</a></p><p>Podcast #10 and #11</p><p><a href="https://newstalkkgvo.com/podcast/popup/?id=5f6b587d66f6297313f7fd67&item=0&theme=light&playertype=player">click here</a> and search for the podcast on June 8th 2022 and August 26th 2021</p><p><a href="https://player.fm/series/future-hindsight/city-life-and-remote-work-matthew-e-kahn">Podcast #12 </a></p><p><br /></p><p>Here are some Going Remote related videos. </p><p><a href="https://www.youtube.com/watch?v=NsYjI-04BrY&t=46s">Video #1</a></p><p><a href="https://www.youtube.com/watch?v=qTxEbW41TOk&t=336s">Video #2</a></p><p><a href="https://www.youtube.com/watch?v=f5bNma3HG1E&t=3s">Video #3: An Interview with Cole Jones</a></p><p><a href="https://www.youtube.com/watch?v=xQ-c0CgQBuc&t=220s">Video #4: An Interview with Adele Bihn</a></p><p><a href="https://www.youtube.com/watch?v=WnYWFgCtLRw">Video #5</a></p><p><a href="https://www.youtube.com/watch?v=qg3rv25tdTY">A USC Dornsife Dialogue Video shot on May 24th 2022</a></p><p><a href="https://publicseminar.org/2022/05/the-future-of-working-from-home/">An Interview about my book</a></p><p><br /></p><p><br /></p>Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-52374083905542406352022-02-27T11:04:00.001-08:002022-02-27T11:04:56.238-08:00Marketing My Four Amazon Economics E-Books that Sell for $1 Each <p> Most economists do not write books. The profession does not reward book authors and not every book sells like Freakonomics or Why Nations Fail. In truth, most economists do not read books and most view economics books to be indulgent as the author writes out thousands of words rather than cutting the fat, facing the referees and making his/her point concisely. The incentives of academic economics also rewards economists for presenting their main regression and writing up the results or writing down their model and solving it. Synthesis work isn't rewarded. "Big Think" is viewed as pretentious and best left to when one is in the shower or in an AEA Presidential Address. We are supposed to be humble and modest!</p><p>Taking all of these facts as true, I want to sell my four Amazon e-books. My grandfather was a shoe salesman and I am a salesman. </p><p>#1 <b><a href="https://www.amazon.com/gp/product/B00E1U992U/ref=dbs_a_def_rwt_bibl_vppi_i3">Fundamentals of Environmental and Urban Economics </a> -- </b>When I was a professor at UCLA, I was tenured at the Institute of the Environment (IOE) and IOE featured students with an "environmental studies" perspective. Many of these students had never studied economics and were generally suspicious that free markets improve our quality of life. I took my environmental economics lectures, for this undergraduate course that was cross-registered between the IOE and the Economics department, and wrote them up. I am encouraged by the fact that several environmental economics professors around the world have adopted this book as their course textbook. At USC, I use this book when I teach undergraduate environmental economics. At the same time, anyone can read this book just as "a book". So, it is an unusual book that it is both a textbook and a non-fiction book. I think it features plenty of ideas that continue to be relevant for thinking about the "chicken and egg issue" of how economic growth affects the environment and how the environment affects economic growth.</p><p>#2 <b><a href="https://www.amazon.com/gp/product/B01N2YQ4S6/ref=dbs_a_def_rwt_bibl_vppi_i5">An Introduction to Empirical Microeconomics </a> </b>This is the weakest of the 4 books but it is the most daring. I taught Econ 101 one quarter at USC Economics. I made a conscious decision to take some risks. Of course, we covered supply and demand and most of the usual big ideas from basic micro but I also chose to spend a lot of time on<a href="https://en.wikipedia.org/wiki/Revealed_preference"> revealed preference. </a> </p><p>Consider the following example. A researcher posits that people gain utility from taking leisure and eating pizza. The price of pizza is $1 a slice. There are 24 hours in the day. Here are some data about this person's daily choices over leisure and pizza consumption. Keep in mind that her budget constraint is: Wage*(24-hours of leisure) = pizza as 24-hours of leisure = hours worked. So, to keep this simple, she has no other bills to pay and she can't borrow or save. Here are some data.</p><p><br /></p><p>Wage Hours Worked Leisure Pizza Consumed</p><p>14 10 14 140</p><p>18 9 15 162</p><p>20 8 16 160</p><p><br /></p><p>From exogenous variation in daily wages, and then observing her leisure and pizza consumption choices, what do you learn about her willingness to tradeoff leisure for pizza? An economist recognizes that we are trying to pin down the slope of her indifference curves from observing her choices. My book solely focuses on these "detective problems". Permit me to give one example of how to solve these problems. When her wage goes up from 18 to $20 an hour, if she continues to work 9 hours she would enjoy 180 slices of pizza but she didn't choose that bundle. Instead she chose to only work 8 hours per day. She reveals that she is willing to sacrifice 18 slices of pizza to have 1 more hour of leisure per day. This is a lower bound on what she is willing to pay for leisure at that point. </p><p>In my book #2, I argue that the right way to teach Econ 101 is to start from observed behavior and behavioral change (in this case as wages change --- how does the worker change her behavior) and then invert back what we learn about a person or the people in an economy.</p><p><br /></p><p>#3 <b><a href="https://www.amazon.com/gp/product/B07DFPQX9D/ref=dbs_a_def_rwt_bibl_vppi_i7">Price Theory Problems </a> </b>Back in the Fall of 1988, I took Gary Becker's Econ 301 PHD class at the University of Chicago. This was a time before power point and even the Internet. Each week, a highly challenging and strange homework would be handed to the class. Unlike typical first year PHD homeworks, these problems were not cut and dried. The questions were loose and required plenty of thinking. While I don't have my old homeworks, I do have memories of the problems and the question frame that Professor Becker tried to stir up. In writing out these problems, I'm not recycling old stuff. I'm trying to show both undergraduates and PHD students how to think in the price theory tradition. I believe that to be a successful economist requires several skills and that the Price Theory approach merits more attention than it currently receives.</p><p>#4 <b><a href="https://www.amazon.com/gp/product/B09QLX68MJ/ref=dbs_a_def_rwt_bibl_vppi_i0">An Introduction to Urban Economics </a> </b>My most recent e-book. In fall 2021, I gave some really good USC Economics Econ 367 undergraduate urban economics lectures and I gave them on Zoom. This allowed me to have access to a set of transcripts of what I said in class. I took these transcripts and completely rewrote them into this book. In my humble opinion, most urban economics texts are sort of boring. Similar to Book #1, I have created a hybrid book that can either be read as non-fiction or used as a textbook. My book has several features that other books don't have. It explicitly discusses empirical methodology for testing hypotheses. It discusses the climate change and urbanization challenge and it devotes attention the political economy of urban externality challenges. It also has a pretty good chapter on cities in the developing world and weaves in my ideas about how Work from Home will affect different cities. </p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p>Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-68563905610129541162022-01-23T04:55:00.007-08:002022-01-24T03:53:06.263-08:00The Consequences of Banks Pursuing a "Double Bottom Line" as the Federal Reserve Prioritizes Climate Change Risks<p> China features state owned enterprises (SOEs) that pursue a "double bottom line". They simultaneously seek to earn profit and to please the powerful Central Government. Relative to their private sector counterparts, these Chinese SOE firms receive special treatment. They can often access subsidized energy, land and capital. Facing such low factor prices such firms use more resources and this creates distortions because the opportunity cost of one firm using scarce resources is that another more productive firm does not use those resources. <a href="https://academic.oup.com/qje/article-abstract/124/4/1403/1917179">Macroeeconomists continue </a>to study the implications of such misallocation for the macro-economy.</p><p>Do China's SOEs and the resulting economic growth losses offer a preview for America's future if the Federal Reserve's nascent climate initiative is pursued? This blog post sketches out the microeconomic issues.</p><p>The Federal Reserve is taking on more and more functions in the U.S economy. Why? One reason is Congressional gridlock. Of course the Federal Reserve has a regulatory charge that one can look up on Wikipedia but at the end of the day, the Federal Reserve is a collection of people who have skills and incentives and what interests me here is; "what do they do all day long?" "How does their agenda affect the macroeconomy, the wealth distribution and the risks posed by climate change?"</p><p>Economists are taught to think through the "counter-factual". What if the<a href="https://johnhcochrane.blogspot.com/2021/07/how-much-does-climate-change-actually.html"> Federal Reserve was run by John</a> Cochrane and there was no Climate Change Mandate? Chairman Cochrane would likely be a vanilla Chair who would focus on committing to "rules over discretion" in order to maximize economic growth. The Government sets clear "rules of the game" and Tom Sargent would sleep well at night. </p><p>In such an economy, for profit banks would focus on earning profit. Such firms would lose profit if they make "bad loans". The banks would not have a "double bottom line" focus. If the CEO of such a bank wants to give her earnings to purchase carbon offsets that would be fine with John Cochrane and Milton Friedman. Chairman Cochrane would likely commit to "no bailouts"and he would commit to a learning process to transform "unknown unknowns" about emerging climate risks into "known unknowns".</p><p>Banks who bear the costs of new risks have strong incentives to learn about the emerging spatial and temporal distribution of risks associated with extreme heat, wildfires and natural disasters. In this piece, I discuss the <a href="https://theconversation.com/a-new-ratings-industry-is-emerging-to-help-homebuyers-assess-climate-risks-171898">emerging climate risk rating agencies </a>and how their information could help banks to make better "bets" (more below). Researchers at the Federal Reserve of San Francisco and academic economists are actively estimating "climate effect" regressions to document such effects. Read my co-authored<a href="https://ideas.repec.org/p/nbr/nberwo/28050.html"> 2020 NBER for an examp</a>le. <a href="https://www.youtube.com/watch?v=hJEWdPsMqRQ">Watch my video here</a> on the role of the academic as the new Paul Revere in nudging profit maximizers to anticipate emerging risks.</p><p>In lending other people's money (from deposits), banks make bets about the future. Given that assets are tied to a place, these are place based bets. In the face of ambiguous climate change, some of these bets will prove to be "bad bets". If Bank of America (BoA) lends me $1 million dollars to build a home in a place that subsequently floods and I then default on my loan, Bank of America has a problem.</p><p>But, this raises dynamic issues. Why did BoA make me a fixed interest loan for 30 years? Why didn't it make me a 15 year loan? Why didn't it tie the interest rate to the location specific risk? Why didn't BoA require me to have a lower LTV so that I have more "skin in the game"? Why didn't BoA co-ordinate with an insurance company to offer me a package of insurance and a loan that incentivizes me to invest in self protection so that my house faces lower risk from natural disaster? If these microeconomic points about climate change adaptation interest y<a href="https://www.amazon.com/Adapting-Climate-Change-Management-Uncertain/dp/0300246714">ou, then read my 2021 Yale Press book.</a></p><p>If the Federal Reserve can commit to no "bailouts" then banks actually have a greater incentive to take these actions! Climate change adaptation is accelerated by having Chairman Cochrane in charge! To concisely state my point, banks will internalize the consequences of climate change on their profitability if they bear the costs of not taking climate change seriously!!</p><p>One important point to note here relates to economic justice. If minority groups are physically over-represented in climate risky areas then this group's neighborhoods will now face a higher cost of borrowing under these rules. If Matthew is Black and if I own a home in a Black majority neighborhood that faces intense climate risk, then under the rules sketched out in this Blog post, borrowers who want to buy my house will face worse loan terms and they will bid less aggressively for my home. This lowers the resale value of my home and lowers my rate of return on housing. This is a serious issue. In this<a href="https://ideas.repec.org/p/nbr/nberwo/28759.html"> 2021 NBER paper, I explore the general case here</a>. I will return to this point in a future blog post.</p><p>To conclude this blog post, I want to hear from economists concerning what is the comparative advantage of the Federal Reserve Board in "fighting" climate change? If for profit banks believe they can please the Biden Administration's Fed by appearing to take the climate change seriously, then they become a type of Chinese SOE and the issue of the misallocation of capital arises. </p><p><br /></p><p><br /></p>Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-3334610494625228842022-01-06T10:25:00.002-08:002022-01-06T10:29:19.294-08:00Applied Game Theory and the Medium Term Reputation Gains from the Recent China-USA Trade War<p> The new issue of the Economist includes<a href="https://www.economist.com/finance-and-economics/2022/01/01/new-research-counts-the-costs-of-the-sino-american-trade-war"> an excellent Free Exchange column </a>titled Lose-Lose Ordeal with the heading; "New research counts the costs of the Sino-American trade war". The article does a great job citing the new research by several top economists including my old colleague Pablo Fajgelbaum. </p><p>Empirical research helps to understand the short run dynamics brought about by the Trump tariffs. But, what do we know about the medium term reputation effects?</p><p>Basic game theory teaches us that if you can build up a credible reputation for sometimes not pursuing your short term interest you can improve your bargaining power. <a href="https://blogs.cornell.edu/info2040/2017/09/10/30860/">Richard Nixon told his advisers </a>that he wanted to build up a reputation for being "crazy". Here is<a href="https://slate.com/news-and-politics/2017/04/trump-is-inadvertently-putting-nixons-madman-theory-to-the-test.html"> a 2017 Slate piece.</a></p><p>During the Presidencies of Bill Clinton and Barack Obama, the U.S was predictable in its interactions with China. Has President Trump's actions helped future U.S Presidents by inserting some doubt in the minds of China's leaders? Can they confidently predict what strategy the U.S will play in future economic strategic games?</p><p>I believe that the answer is no. So, my question for the game theorists; when an opponent inserts some uncertainty into her rival's head -- when does this help one party in the game? The Economist magazine gives the Trump Administration no credit for this medium term "benefit". Is the Economist magazine, and the empirical trade economists, right to ignore the reputational effects of unilaterally raising tariffs? </p><p>Finally some nuance. I am not saying that the Trump Trade War was "good". I am saying that it appears to me that The Economist and the academic economists are ignoring an interesting (and hard to quantify) medium term benefit of the Trump Administration's strategic play. </p><p>There is a certain irony that future Democrat Administrations will gain from this policy uncertainty shock.</p><p>In our new age of Machine Learning and reduced form empirics and field experiments, what insights does applied game theory offer? If your rival predicts that you will always comply with "their proposal", what happens next in the game? </p>Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-56341794809103481492022-01-04T06:57:00.006-08:002022-01-04T07:31:19.115-08:00How Do We Nudge "Behavioral" Decision Makers to Adapt to Emerging Climate Risks?<p> An excellent <a href="https://www.nber.org/papers/w29621">new NBER Working Paper t</a>itled "Mandated vs. Voluntary Adaptation to Natural Disasters: The Case of U.S Wildfires" has been published. The authors have assembled a great data set to document that building codes cause upgrades of properties such that subsequent wildfires cause lower damage to property. This is a highly optimistic adaptation paper and it puts Government at the center of achieving adaptation progress. The authors argue that building codes are a binding constraint such that in the absence of this constraint that people would have chosen to build lower quality structures that would have exposed them to more fire risk.</p><p>A direct quote from the paper's abstract: </p><p><span face="Arimo, "Lucida Grande", Helvetica, Arial, sans-serif" style="background-color: white; font-size: 16px;">"Despite escalating disaster losses and predicted increases in weather-related catastrophes, takeup of protective technologies and behaviors appears limited by myopia, externalities, and other factors. One response to such frictions is to mandate adaptive investment."</span></p><p><span style="background-color: white; font-size: 16px;"><span style="font-family: inherit;">In this blog post, I will offer a few thoughts related to my research agenda on the microeconomics of climate change adaptation. </span></span></p><p><span style="background-color: white; font-size: 16px;"><span style="font-family: inherit;">First, I am thrilled that more and more young scholars are working on this topic. I am not surprised that their work highlights our economy's impressive adaptation capacity. </span></span></p><p><span style="background-color: white; font-size: 16px;"><span style="font-family: inherit;">Second, I love this intellectual tension that posits that behavioral economics can explain under-investment in resilience. In my 2015 paper, I discuss the broad issue.</span></span></p><ol class="list-group" style="-webkit-box-direction: normal; -webkit-box-orient: vertical; background-color: white; box-sizing: border-box; color: #333333; display: flex; flex-direction: column; font-family: Asap, sans-serif; font-size: 0.9em; margin-bottom: 0px; margin-top: 0px; padding-left: 0px;"><li class="list-group-item downgate" style="background: rgb(239, 243, 248); border: 1px solid rgba(0, 0, 0, 0.125); box-sizing: border-box; list-style: inside decimal; margin-bottom: -1px; padding: 0.75rem 1.25rem; position: relative;">Kahn Matthew E., 2015. "<span style="box-sizing: border-box; font-weight: bolder;"><a href="https://ideas.repec.org/a/bpj/evoice/v12y2015i1p25-30n3.html" style="background-color: transparent; box-sizing: border-box; color: #2d4e8b; text-decoration-line: none;">Climate Change Adaptation Will Offer a Sharp Test of the Claims of Behavioral Economics</a></span>," <a href="https://ideas.repec.org/s/bpj/evoice.html" style="background-color: transparent; box-sizing: border-box; color: #2d4e8b; text-decoration-line: none;">The Economists' Voice</a>, De Gruyter, vol. 12(1), pages 25-30, August.</li></ol><p><span face="Arimo, "Lucida Grande", Helvetica, Arial, sans-serif" style="background-color: white; font-size: 16px;"> </span><span style="background-color: white; font-size: 16px;"><span style="font-family: inherit;">My main point is to discuss the role of the insurance industry here. In my c<a href="https://hbr.org/2017/08/how-the-insurance-industry-can-push-us-to-prepare-for-climate-change">o-authored 2017 Harvard Business Review piece, </a>we argue that the insurance industry could be the "adult in the room" here if insurers are allowed to risk price and to "price gouge" when risks rise. Suppose that fire risk is rising in a fire zone. In the absence of government regulation, insurance prices for real estate will rise there. An insurer could embrace the E<a href="https://www.brookings.edu/blog/future-development/2021/10/15/enhancing-climate-change-resilience-through-self-protection-public-investment-and-market-insurance/">hrlich/Becker paradigm </a>and offer a non-linear contract that lowers the fire insurance premium if the property owner takes specific precautions. In this case, real estate developers who build new homes in the fire zone would take these safety enhancing steps in building the homes because they can sell the home for a higher price. Why? The present discounted value of insurance premium expenditures will be lower for the safer homes. In my 2021 <a href="https://www.rms.com/sites/default/files/2021-08/MatthewKahn_IndustyPerspective_072321.pdf">RMS interview, I expand</a> upon these themes. </span></span></p><p><span style="background-color: white; font-size: 16px;"><span style="font-family: inherit;">I view government building codes and the insurance industry's non-linear pricing to be substitutes in building up our resilience to increasing climate risk. Since the government regulates insurance and effectively subsidizes risk taking (by putting limits on insurer "price gouging"), building codes are needed to raise the average quality of the housing stock in risky places. </span></span></p><p><span style="background-color: white; font-size: 16px;"><span style="font-family: inherit;">Read this <a href="https://www.nytimes.com/2020/11/05/climate/california-wildfire-insurance.html">New York Times piece</a> titled</span></span></p><h1 class="css-rsa88z e1h9rw200" data-testid="headline" id="link-29667910" style="background-color: white; border: 0px; color: #121212; font-family: nyt-cheltenham, georgia, "times new roman", times, serif; font-size: 2.5rem; font-stretch: inherit; font-style: italic; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: 3rem; margin-bottom: 1rem; margin-right: auto; margin-top: 0px; margin: 0px auto 1rem calc((100% - 600px) / 2); max-width: none; padding: 0px; position: relative; text-size-adjust: 100%; vertical-align: baseline; width: 660px;">California Bars Insurers From Dropping Policies in Wildfire Areas</h1><p><span style="background-color: white; font-size: 16px;"><span style="font-family: inherit;">Finally, a theme I discuss in<a href="https://www.amazon.com/Matthew-E.-Kahn/e/B001JSDZTK%3Fref=dbs_a_mng_rwt_scns_share"> my 2021 Yale Press book </a>is that home owners are "amateurs". Frank Wolak and I discuss this in our 2013 energy paper. If more people rent their homes then professional managers would manage more of the housing stock and these profit maximizers will have the scale of assets to invest in human capital to better understand the emerging risk. If professional management companies operated our assets, then the case for the need for government mandated building codes would be weaker.</span></span></p><p><span style="background-color: white; font-size: 16px;"><span style="font-family: inherit;">Permit me to suggest a new research topic on endogenous adaptation innovation. Building codes serve as a commitment device. If innovators in the home construction sector see that there are new building code mandates, this acts as a "Big Push" commitment device. Such innovators now have an incentive to invest their time to learn how to make safer homes and this shifts the production possibility frontier.</span></span></p><p><span style="background-color: white; font-size: 16px;"><span style="font-family: inherit;">Why do so many people live in the fire zone? If we up zone in cities, then fewer people will live in areas that face increased fire risk. Rea<a href="https://www.nytimes.com/2017/11/03/opinion/california-fires-housing.html">d Enrico's great New York Times piece. </a></span></span></p><p><span style="background-color: white; font-size: 16px;"><span style="font-family: inherit;">UPDATE: I do have a question about durable capital. Building codes affect the quality of the flow of new housing constructed in the risky area. I do not believe that building codes affect the stock of existing homes that have not burned down. The average risk at a point in time is a weighted average of the risks faced by both sets. In slow growing areas, the building codes will not achieve average risk reduction for a long time.</span></span></p><p><span style="background-color: white; font-size: 16px;"><span style="font-family: inherit;">In contrast, insurance pricing that incentivizes self protection would impact all homes immediately . So, I claim that using insurance prices will more quickly flatten the climate damage function than relying on binding building codes for new homes. </span></span></p><p><span style="background-color: white; font-size: 16px;"><span style="font-family: inherit;"><br /></span></span></p><p><span style="background-color: white; font-size: 16px;"><span style="font-family: inherit;"><br /></span></span></p><p><span style="background-color: white; font-size: 16px;"><span style="font-family: inherit;"><br /></span></span></p><p><span style="background-color: white; font-size: 16px;"><span style="font-family: inherit;"><br /></span></span></p><p><span style="background-color: white; font-size: 16px;"><span style="font-family: inherit;"><br /></span></span></p><p><span style="background-color: white; font-size: 16px;"><span style="font-family: inherit;"><br /></span></span></p><p><span style="background-color: white; font-size: 16px;"><span style="font-family: inherit;"><br /></span></span></p><p><span style="background-color: white; font-size: 16px;"><span style="font-family: inherit;"><br /></span></span></p><p><span style="background-color: white; font-size: 16px;"><span style="font-family: inherit;"><br /></span></span></p><p><span style="background-color: white; font-size: 16px;"><span style="font-family: inherit;"><br /></span></span></p><p><br /></p>Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-22200715894369434702021-12-11T05:14:00.002-08:002021-12-11T05:22:13.300-08:00The Economic Consequences of Youth Pessimism About Climate Risk: Lessons from Slemrod's "Savings and the Fear of Nuclear War"<p> The media keeps running articles that Greta Thunberg and a majority of the world's young people worry that "<a href="https://t.co/KjuCbUDwkn">society is doomed"</a> because of climate change. I understand that they seek to create a political movement to enact a global carbon tax. I support the carbon tax but do they really believe their rhetoric? Are they really <a href="https://yalebooks.yale.edu/book/9780300246711/adapting-climate-change#:~:text=This%20book%20considers%20how%20individual,are%20affected%20by%20climate%20change.">such adaptation pessimists</a>? What are the implications of their mindset for their mental health and their investment in themselves at this key point in their life-cycle?</p><p>Joel Slemrod is a top economist at the University of Michigan. In 1986, he published a paper that today only has 40 citations. It was titled; <a href="https://journals.sagepub.com/doi/abs/10.1177/0022002786030003001?casa_token=Ce72x3Zvle4AAAAA%3Aj3XMfKU6QyTAjEl-ra_pTlQRt40Zze06XizPlWrGtCY6Wp-8zSjABDwcqVxQ1s_7oKSSy4tpf2HN&">"Savings and the Fear of Nuclear War" </a>. The point of this blog post is to rehabilitate his paper in a new context. Here is his paper's abstract;</p><p><span style="background-color: white; color: #333333; font-family: arial; font-size: 16px;">The hypothesis of this article is that the performance and, in particular, the rate of saving in the postwar U.S. economy has been influenced by the changes in the public perception of the threat of a catastrophic nuclear war. An increased threat shortens the expected horizon of individuals, and thus reduces their willingness to postpone present consumption in favor of investment. The hypothesis is tested by expanding a standard savings function estimation technique to include a measure of the perceived threat of nuclear war. Several alternative measures of the perceived threat are considered, based either on the setting of the “doomsday” clock published monthly in </span><i style="background-color: white; color: #333333; font-family: arial; font-size: 16px;">Bulletin of the Atomic Scientists</i><span style="background-color: white; color: #333333; font-family: arial; font-size: 16px;">, which reflects the editors' judgement about the likelihood of a nuclear conflict, or on an index of the extent of press coverage of nuclear war issues. The tests all support a large and statistically significant impact of the threat of nuclear war on the rate of private saving. These tests are not viewed as conclusive evidence in favor of the economic impact of the perceived threat of nuclear war. Nevertheless, this research suggests that economists may have been overlooking an important source of influence in the postwar, postnuclear U.S. economy. Conceivably, it could affect not only the private savings rate but also other economic variables such as the level of investment in human capital, the level of asset prices, the term structure of interest rates, and the rate of inflation.</span></p><p><span style="color: #333333; font-family: inherit;"><span style="background-color: white;">Substitute the word climate change for "nuclear war" and let's focus on young people who are still being "Formed". The last sentence of the article is what really interests me. Based on standard life-cycle investment models, if the young truly believe that we are doomed; this creates several predictions; relative to a world where we are "not doomed";</span></span></p><p><span style="color: #333333; font-family: inherit;"><span style="background-color: white;">Predictions due to over-estimation of future "doom"</span></span></p><p>The young will be more likely to currently engage in substance abuse</p><p>The young will focus on leisure (Instagram, social media)</p><p><span style="color: #333333; font-family: inherit;"><span style="background-color: white;">The young will be less likely to bear the fixed costs of training that only payoff in the future</span></span></p><p><span style="color: #333333; font-family: inherit;"><span style="background-color: white;">The young will not invest in understanding our institutions.</span></span></p><p><span style="color: #333333; font-family: inherit;"><span style="background-color: white;">If youth is an essential investment stage such that at middle age we can't reverse our past choices, then the current "doom and gloom" will affect humanity through the OLG mechanism. The current young will inherit this world. </span></span></p><p><span style="color: #333333; font-family: inherit;"><span style="background-color: white;">Older economists will see that this is a repeat of David Meltzer's University of Chicago thesis on the causal effect of AIDS in Africa on educational attainment there in the 1980s.</span></span></p><p><span style="color: #333333; font-family: inherit;"><span style="background-color: white;">I will be writing more about this but adults who agree with this blog post should encourage their teens to read my 2021 book and to study some economics. </span></span></p><p><span style="color: #333333; font-family: inherit;"><span style="background-color: white;"><br /></span></span></p><p><span style="color: #333333; font-family: inherit;"><span style="background-color: white;"><br /></span></span></p><p><span style="color: #333333; font-family: inherit;"><span style="background-color: white;"><br /></span></span></p><p><span style="color: #333333; font-family: inherit;"><span style="background-color: white;"><br /></span></span></p><p><span style="color: #333333; font-family: inherit;"><span style="background-color: white;"><br /></span></span></p><p><span style="color: #333333; font-family: inherit;"><span style="background-color: white;"><br /></span></span></p><p><span style="color: #333333; font-family: inherit;"><span style="background-color: white;"><br /></span></span></p><p><span style="color: #333333; font-family: inherit;"><span style="background-color: white;"><br /></span></span></p><p><span style="background-color: white; color: #333333; font-family: arial; font-size: 16px;"><br /></span></p>Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-69358098704684842292021-11-20T08:29:00.003-08:002021-11-20T08:29:43.208-08:00What Insights Does Economics Offer About the Nascent Biden Administration Transport Infrastructure Investment Program?<p> The Washington Post has <a href="https://www.washingtonpost.com/transportation/2021/11/19/buttigieg-infrastructure-transportation-funding/">published a piece stating</a> that the Secretary of Transportation, Peter Buttigieg, is the big winner of the Biden Infrastructure Bill as he will be attending many ribbon cutting ceremonies as grateful local mayors shake his hand. </p><p>Economic research offers many insights here about the efficiency and equity effects of this multi-billion dollar investment.</p><p>Point #1: This is an irreversible investment. When a city builds a new subway line, this billion dollar project cannot be later sold on Ebay and use the $ to do something else. In contrast to light rail and subway lines, dedicated buses feature more option value because they can be sold off or redeployed on different routes in the same city. Given that we don't know how cities will develop over time, this real option has value.</p><p>Point #2; Past expansions of public transit have not significantly increased ridership with the exception of Washington DC. In the case of Los Angeles, improves in rail service (such as the Light Rail on Exposition that I ride) has taken bus riders away from the bus. <a href="https://scholar.google.com/scholar?hl=en&as_sdt=0%2C5&q=matthew+kahn+2005+baum+snow&btnG=">See our 2005 paper. </a> If crime rates continue to be a concern in cities then the middle class will be even less likely to use the "shiny new" infrastructure. <a href="https://www.sciencedirect.com/science/article/abs/pii/S0094119007000046">The poor do rely on public transit to move around cities</a> and an expansion will improve their quality of life. An economist would ask whether they value this benefit more than the cash equivalent?</p><p>Point #3: The older infrastructure in the nation is located in older cities, where the population is barely growing (or shrinking) and where the voters are mainly Democrats. </p><p>Point #4: The highways tend to be built in the suburbs where the voting base leans Republican. <a href="https://www.hamiltonproject.org/papers/fix_it_first_expand_it_second_reward_it_third_a_new_strategy_for_ameri">My 2011 Brookings piece with David o</a>ffers several constructive ideas for how to "build back better" here.</p><p>Point #5: If progressive cities gain better infrastructure due to the Biden Investment AND if they don't build much housing (the<a href="https://www.sciencedirect.com/science/article/pii/S0094119010000720?casa_token=oj_6PpVP_MUAAAAA:VJeay4I-TvaKjNsV3RzcR9JnArO8UibRXCjbJJsZ5B3FJcFi3JT1rV4S7W-oyUNjYL83pKEIK9s"> progressive city NIMBYism is well documented)</a> , then housing prices will rise and the poor and middle class will be further squeezed by this new investment. </p><p>Point #6: There are many economics consulting firms that intentionally offer extremely optimistic ridership estimates ex-ante and this helps ambitious government officials to justify projects (i.e to say that it passes a cost/benefit test) when in reality --- ex-post evaluations show low usage of the new infrastructure. Se<a href="https://rosap.ntl.bts.gov/view/dot/9726">e Pickrell 1992.</a></p><p>Point #7: Given that unions are powerful in progressive cities, what is the marginal cost of infrastructure creation in these cities? Is the Department of Transportation seeking to build a new capital stock or to enrich a special interest group that supports the Democrats? How many middle class new construction jobs will be created? Will the expansion of the public capital stock crowd out the expansion of the private capital stock as construction crews work on transport infrastructure rather than building private sector projects? What is the shape of the construction supply curve?</p><p>Point #8, once the new infrastructure is completed --- will this greatly improve urban quality of life in cities such as Baltimore that have been shrinking? How will the Mayor and local civic leaders and private sector stakeholders change their investments and policy decisions? What positive synergies might emerge? Our <a href="https://21cc.jhu.edu/unlocking-the-potential-of-post-industrial-cities/">2021 Unlocking Book</a> explores some of these themes of investment co-ordination between the private and the public sector. </p><p><br /></p><p><br /></p><p><br /></p>Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-24281797450777366602021-11-17T05:40:00.002-08:002021-11-17T05:44:33.954-08:00Contrasting Adapting to Contagious Disease Risk with Adapting to Climate Change<p> <a href="https://time.com/6115046/bill-gates-pandemic-preparedness/?utm_source=twitter&utm_medium=social&utm_campaign=editorial&utm_term=health_&linkId=139759290">Bill Gates argues</a> that we were insufficiently prepared for COVID-19. Does our failure to adequately prepare for this crisis portend a future under-investment<a href="https://www.brookings.edu/blog/future-development/2021/10/15/enhancing-climate-change-resilience-through-self-protection-public-investment-and-market-insurance/"> to invest in self-protection </a>to reduce our exposure to climate change risk?</p><p>In the case of COVID, we had enjoyed 100 years of little exposure to vast contagion. This certainly played a role in lulling us into a complacent mindset. Building on the work of Chuck Manski, a good research project (armed with a time-machine) would take the research back to each year before February 2020 to ask different people around the world about their perception and degree of worry about infectious disease risk as a major global challenge. I predict that few people would have ranked it has a major concern.</p><p>Imagine if a Presidential Candidate in 2016 had said, "I will set aside 1% of the Federal Budget (so roughly $30 billion a year) to spend on vaccine preparation and logistics." This candidate would have been mocked for wasting money.</p><p>Why didn't the drug companies invest in the architecture to have vaccines ready to be mass produced? My guess is that the answer is time-consistency. These for profit firms anticipated that the probability of a major contagion is low and if this state of the world occurs governments would not allow them to "price gouge". So, by backwards-induction --- it isn't profitable to take the risk to invest in such surplus capacity for a product that is highly likely to not be demanded. Activist government destroyed the incentive to take this risk!</p><p><br /></p><p>Pivoting to Climate Change Adaptation</p><p>My optimism about our rising capacity to adapt to climate change has only been increased by the COVID crisis.</p><p>We now have zoom and major firms are roughly as productive working fact to face as WFH. Workers are now free to live where they want to live and this opens up many new permutations and possibilities.</p><p>We now have more imagination that scary scenarios can suddenly occur and that we can't rely on government to "save us". We are adults and we must use markets and market forces to cope with these changes.</p><p>Unlike with COVID, there is much more cross-sectional variation in shocks caused by climate change. Mother Nature is running many more experiments here as different places face a Texas Freeze, a West Coast Fire or a Hurricane Ida. Similar to Batting practice in baseball, this experience helps us to learn. An ideas are public goods.</p><p>In contrast, with COVID --- we didn't have enough experience with adapting to such risk and despite this major progress was made in keeping our economy humming along during crisis.</p><p>A key point that I want economists thinking about is that a "climate shock" is a shock to a place. This shock affects people who live and/or work at that place or own assets there or use products grown and produced there. Markets mediate the effect of the shock to a place on different people. In the case of a COVID-infection --- this is a shock to a person that can be directly amplified to another person through physical contact. Under what circumstances does a shock to places (climate shocks) look a lot like shocks to people (COVID infection)?</p><p>My 202<a href="https://www.amazon.com/Matthew-E.-Kahn/e/B001JSDZTK%3Fref=dbs_a_mng_rwt_scns_share">1 book Adapting to Climate Change and my 2022 book Going Remote b</a>uild on these themes.</p><p>In earlier work, I ha<a href="https://drive.google.com/file/d/0B3nXRUop2A2BaGd1bXMtc0dUZlE/edit?resourcekey=0-Nxk6p3CvHwXdONDt7x1zXw">ve contrasted adapting to terror attacks versus climate c</a>hange. New risk adaptation work could explore the lessons learned from adapting to terror risk, infectious disease risk and climate change risk.</p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p>Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-47715280730184777742021-11-09T13:31:00.003-08:002021-11-09T13:39:58.940-08:00Will the Biden Administration's Trillion Dollar Investment in Infrastructure Unlock the Potential of Post-Industrial Cities?<p> <span color="var(--color-text)" style="font-family: "Source Serif Pro", serif; font-size: var(--font-size-large); font-weight: var(--artdeco-reset-typography-font-weight-normal);">The Biden Administration is about to enact a new infrastructure law that will spend more than $1 trillion dollars on rebuilding America's infrastructure. Cities such as Baltimore, Cleveland, Detroit and St. Louis need new investment to boost the local economy, reduce local poverty, and increase the quality of life of children in these cities. My co-authored 2021 book; "</span><a href="https://21cc.jhu.edu/unlocking-the-potential-of-post-industrial-cities/" rel="nofollow noopener" style="border: var(--artdeco-reset-link-border-zero); box-sizing: inherit; font-family: "Source Serif Pro", serif; font-size: var(--artdeco-reset-base-font-size-hundred-percent); font-weight: 600; margin: var(--artdeco-reset-base-margin-zero); overflow-wrap: break-word; padding: var(--artdeco-reset-base-padding-zero); text-decoration: var(--artdeco-reset-link-text-decoration-none); touch-action: manipulation; vertical-align: var(--artdeco-reset-base-vertical-align-baseline);" target="_blank">Unlocking the Potential</a><span color="var(--color-text)" style="font-family: "Source Serif Pro", serif; font-size: var(--font-size-large); font-weight: var(--artdeco-reset-typography-font-weight-normal);"> </span><span color="var(--color-text)" style="font-family: "Source Serif Pro", serif; font-size: var(--font-size-large); font-weight: var(--artdeco-reset-typography-font-weight-normal);">of Post-Industrial Cities" explores the synergistic investments that are needed to help the many poor people who live in poor cities to achieve their own "American Dream". Unlike other urban books, our book focuses on how to use free markets and the private sector to be the catalyst here. The microeconomic approach to thinking about urban revitalization offers many new insights for how such post-industrial cities can escape the local poverty trap. My book (co-authored with the wise Mac McComas) <a href="https://www.amazon.com/gp/product/B08FF3X8TT/ref=dbs_a_def_rwt_bibl_vppi_i0">has received six 5 star reviews on Amazon.</a> This average rating is much higher than my book ratings for my other books. </span></p><p><span color="var(--color-text)" style="font-family: "Source Serif Pro", serif; font-size: var(--font-size-large); font-weight: var(--artdeco-reset-typography-font-weight-normal);">Urban economists have written about the synergies between investments in people and place based infrastructure. In a series of co-authored papers, I have measured these effects. Here are a few examples;</span></p><p><span color="var(--color-text)" style="font-family: "Source Serif Pro", serif; font-size: var(--font-size-large); font-weight: var(--artdeco-reset-typography-font-weight-normal);"><span style="background-color: #eff3f8; color: #333333; font-family: Asap, sans-serif; font-size: 14.4px;">Siqi Zheng & Matthew E. Kahn, 2013. "</span><span style="box-sizing: border-box; color: #333333; font-family: Asap, sans-serif; font-size: 14.4px; font-weight: bolder;"><a href="https://ideas.repec.org/a/bla/reesec/v41y2013i1p1-28.html" style="box-sizing: border-box; color: #2d4e8b; text-decoration-line: none;">Does Government Investment in Local Public Goods Spur Gentrification? Evidence from Beijing</a></span><span style="background-color: #eff3f8; color: #333333; font-family: Asap, sans-serif; font-size: 14.4px;">," </span><a href="https://ideas.repec.org/s/bla/reesec.html" style="box-sizing: border-box; color: #2d4e8b; font-family: Asap, sans-serif; font-size: 14.4px; text-decoration-line: none;">Real Estate Economics</a><span style="background-color: #eff3f8; color: #333333; font-family: Asap, sans-serif; font-size: 14.4px;">, American Real Estate and Urban Economics Association, vol. 41(1), pages 1-28, March.</span></span></p><p><span color="var(--color-text)" style="font-family: "Source Serif Pro", serif; font-size: var(--font-size-large); font-weight: var(--artdeco-reset-typography-font-weight-normal);"></span></p><ol class="list-group" style="-webkit-box-direction: normal; -webkit-box-orient: vertical; background-color: white; box-sizing: border-box; color: #333333; display: flex; flex-direction: column; font-family: Asap, sans-serif; font-size: 0.9em; margin-bottom: 0px; margin-top: 0px; padding-left: 0px;"><li class="list-group-item downfree" style="background: rgb(239, 243, 248); border: 1px solid rgba(0, 0, 0, 0.125); box-sizing: border-box; list-style: inside decimal; margin-bottom: -1px; padding: 0.75rem 1.25rem; position: relative;">Dora L. Costa & Matthew E. Kahn, 2015. "<span style="box-sizing: border-box; font-weight: bolder;"><a href="https://ideas.repec.org/a/aea/aecrev/v105y2015i5p564-69.html" style="background-color: transparent; box-sizing: border-box; color: #2d4e8b; text-decoration-line: none;">Declining Mortality Inequality within Cities during the Health Transition</a></span>," <a href="https://ideas.repec.org/s/aea/aecrev.html" style="background-color: transparent; box-sizing: border-box; color: #2d4e8b; text-decoration-line: none;">American Economic Review</a>, American Economic Association, vol. 105(5), pages 564-569, May.</li></ol><p><span color="var(--color-text)" style="font-family: "Source Serif Pro", serif; font-size: var(--font-size-large); font-weight: var(--artdeco-reset-typography-font-weight-normal);"><span style="background-color: #eff3f8; color: #333333; font-family: Asap, sans-serif; font-size: 14.4px;">Seungwoo Chin & Matthew E. Kahn & Hyungsik Roger Moon, 2020. "</span><span style="box-sizing: border-box; color: #333333; font-family: Asap, sans-serif; font-size: 14.4px; font-weight: bolder;"><a href="https://ideas.repec.org/a/bla/reesec/v48y2020i3p886-914.html" style="box-sizing: border-box; color: #2d4e8b; text-decoration-line: none;">Estimating the Gains from New Rail Transit Investment: A Machine Learning Tree Approach</a></span><span style="background-color: #eff3f8; color: #333333; font-family: Asap, sans-serif; font-size: 14.4px;">," </span><a href="https://ideas.repec.org/s/bla/reesec.html" style="box-sizing: border-box; color: #2d4e8b; font-family: Asap, sans-serif; font-size: 14.4px; text-decoration-line: none;">Real Estate Economics</a><span style="background-color: #eff3f8; color: #333333; font-family: Asap, sans-serif; font-size: 14.4px;">, American Real Estate and Urban Economics Association, vol. 48(3), pages 886-914, September.</span></span></p><p><span color="var(--color-text)" style="font-family: "Source Serif Pro", serif; font-size: var(--font-size-large); font-weight: var(--artdeco-reset-typography-font-weight-normal);"></span></p><ol class="list-group" style="-webkit-box-direction: normal; -webkit-box-orient: vertical; background-color: white; box-sizing: border-box; color: #333333; display: flex; flex-direction: column; font-family: Asap, sans-serif; font-size: 0.9em; margin-bottom: 0px; margin-top: 0px; padding-left: 0px;"><li class="list-group-item downgate" style="background: rgb(239, 243, 248); border: 1px solid rgba(0, 0, 0, 0.125); box-sizing: border-box; list-style: inside decimal; margin-bottom: -1px; padding: 0.75rem 1.25rem; position: relative;">Dong, Lei & Du, Rui & Kahn, Matthew & Ratti, Carlo & Zheng, Siqi, 2021. "<span style="box-sizing: border-box; font-weight: bolder;"><a href="https://ideas.repec.org/a/eee/regeco/v89y2021ics0166046221000429.html" style="background-color: transparent; box-sizing: border-box; color: #2d4e8b; text-decoration-line: none;">“Ghost cities” versus boom towns: Do China's high-speed rail new towns thrive?</a></span>," <a href="https://ideas.repec.org/s/eee/regeco.html" style="background-color: transparent; box-sizing: border-box; color: #2d4e8b; text-decoration-line: none;">Regional Science and Urban Economics</a>, Elsevier, vol. 89(C).</li><li class="list-group-item downgate" style="background: rgb(239, 243, 248); border: 1px solid rgba(0, 0, 0, 0.125); box-sizing: border-box; list-style: inside decimal; margin-bottom: -1px; padding: 0.75rem 1.25rem; position: relative;">Kahn, Matthew E. & Sun, Weizeng & Wu, Jianfeng & Zheng, Siqi, 2021. "<span style="box-sizing: border-box; font-weight: bolder;"><a href="https://ideas.repec.org/a/eee/juecon/v121y2021ics0094119020300607.html" style="background-color: transparent; box-sizing: border-box; color: #2d4e8b; text-decoration-line: none;">Do political connections help or hinder urban economic growth? Evidence from 1,400 industrial parks in China</a></span>," <a href="https://ideas.repec.org/s/eee/juecon.html" style="background-color: transparent; box-sizing: border-box; color: #2d4e8b; text-decoration-line: none;">Journal of Urban Economics</a>, Elsevier, vol. 121(C).</li></ol><p style="--artdeco-reset-typography_getfontsize: 1.6rem; --artdeco-reset-typography_getlineheight: 1.5; border: var(--artdeco-reset-base-border-zero); box-sizing: inherit; color: var(--color-text); font-family: "Source Serif Pro", serif; font-size: var(--font-size-large); font-weight: var(--artdeco-reset-typography-font-weight-normal); line-height: 3.2rem; margin: 3.2rem 0px; padding: var(--artdeco-reset-base-padding-zero); vertical-align: var(--artdeco-reset-base-vertical-align-baseline);">Since Mac and I know that we do not know all of the answers about the likely impacts of the Biden Infrastructure plan for distressed cities, we have participated in a series of enlightening interviews.</p><p style="--artdeco-reset-typography_getfontsize: 1.6rem; --artdeco-reset-typography_getlineheight: 1.5; border: var(--artdeco-reset-base-border-zero); box-sizing: inherit; color: var(--color-text); font-family: "Source Serif Pro", serif; font-size: var(--font-size-large); font-weight: var(--artdeco-reset-typography-font-weight-normal); line-height: 3.2rem; margin: 3.2rem 0px; padding: var(--artdeco-reset-base-padding-zero); vertical-align: var(--artdeco-reset-base-vertical-align-baseline);">Poor cities that experience job growth and improvements in quality of life often experience gentrification. We discuss this complex issue with <a href="https://www.youtube.com/watch?v=rgZZXeyDo7A" style="border: var(--artdeco-reset-link-border-zero); box-sizing: inherit; font-size: var(--artdeco-reset-base-font-size-hundred-percent); font-weight: 600; margin: var(--artdeco-reset-base-margin-zero); overflow-wrap: break-word; padding: var(--artdeco-reset-base-padding-zero); text-decoration: var(--artdeco-reset-link-text-decoration-none); touch-action: manipulation; vertical-align: var(--artdeco-reset-base-vertical-align-baseline);" target="_blank">Emily Badger of the New York Times.</a></p><p style="--artdeco-reset-typography_getfontsize: 1.6rem; --artdeco-reset-typography_getlineheight: 1.5; border: var(--artdeco-reset-base-border-zero); box-sizing: inherit; color: var(--color-text); font-family: "Source Serif Pro", serif; font-size: var(--font-size-large); font-weight: var(--artdeco-reset-typography-font-weight-normal); line-height: 3.2rem; margin: 3.2rem 0px; padding: var(--artdeco-reset-base-padding-zero); vertical-align: var(--artdeco-reset-base-vertical-align-baseline);">Job Creation and entrepreneurship is essential for a city to flourish. We discuss barriers to entry with Harvard's <a href="https://www.youtube.com/watch?v=RvOlMNmZqhg" style="border: var(--artdeco-reset-link-border-zero); box-sizing: inherit; font-size: var(--artdeco-reset-base-font-size-hundred-percent); font-weight: 600; margin: var(--artdeco-reset-base-margin-zero); overflow-wrap: break-word; padding: var(--artdeco-reset-base-padding-zero); text-decoration: var(--artdeco-reset-link-text-decoration-none); touch-action: manipulation; vertical-align: var(--artdeco-reset-base-vertical-align-baseline);" target="_blank">Edward Glaeser</a></p><p style="--artdeco-reset-typography_getfontsize: 1.6rem; --artdeco-reset-typography_getlineheight: 1.5; border: var(--artdeco-reset-base-border-zero); box-sizing: inherit; color: var(--color-text); font-family: "Source Serif Pro", serif; font-size: var(--font-size-large); font-weight: var(--artdeco-reset-typography-font-weight-normal); line-height: 3.2rem; margin: 3.2rem 0px; padding: var(--artdeco-reset-base-padding-zero); vertical-align: var(--artdeco-reset-base-vertical-align-baseline);">In recent years, Pittsburgh has made a comeback. What are the lessons to be learned from this important case study? We speak to <a href="https://www.youtube.com/watch?v=VMMUb8PhOHw" style="border: var(--artdeco-reset-link-border-zero); box-sizing: inherit; font-size: var(--artdeco-reset-base-font-size-hundred-percent); font-weight: 600; margin: var(--artdeco-reset-base-margin-zero); overflow-wrap: break-word; padding: var(--artdeco-reset-base-padding-zero); text-decoration: var(--artdeco-reset-link-text-decoration-none); touch-action: manipulation; vertical-align: var(--artdeco-reset-base-vertical-align-baseline);" target="_blank">Richard Florida</a> of the University of Toronto.</p><p style="--artdeco-reset-typography_getfontsize: 1.6rem; --artdeco-reset-typography_getlineheight: 1.5; border: var(--artdeco-reset-base-border-zero); box-sizing: inherit; color: var(--color-text); font-family: "Source Serif Pro", serif; font-size: var(--font-size-large); font-weight: var(--artdeco-reset-typography-font-weight-normal); line-height: 3.2rem; margin: 3.2rem 0px; padding: var(--artdeco-reset-base-padding-zero); vertical-align: var(--artdeco-reset-base-vertical-align-baseline);">In our book, we emphasize the key role that mayors play in determining the local "rules of the game" and setting policies and expectations. We discuss Michael Bloomberg's success as Mayor of New York City in an in depth discussion with NYU's <a href="https://www.youtube.com/watch?v=M6Jn8cLH6MM" style="border: var(--artdeco-reset-link-border-zero); box-sizing: inherit; font-size: var(--artdeco-reset-base-font-size-hundred-percent); font-weight: 600; margin: var(--artdeco-reset-base-margin-zero); overflow-wrap: break-word; padding: var(--artdeco-reset-base-padding-zero); text-decoration: var(--artdeco-reset-link-text-decoration-none); touch-action: manipulation; vertical-align: var(--artdeco-reset-base-vertical-align-baseline);" target="_blank">Mitchell Moss</a></p><p style="--artdeco-reset-typography_getfontsize: 1.6rem; --artdeco-reset-typography_getlineheight: 1.5; border: var(--artdeco-reset-base-border-zero); box-sizing: inherit; color: var(--color-text); font-family: "Source Serif Pro", serif; font-size: var(--font-size-large); font-weight: var(--artdeco-reset-typography-font-weight-normal); line-height: 3.2rem; margin: 3.2rem 0px; padding: var(--artdeco-reset-base-padding-zero); vertical-align: var(--artdeco-reset-base-vertical-align-baseline);">Small businesses can be a key piece in the puzzle for creating wealth and private sector jobs in cities. We speak with NYU's <a href="https://www.youtube.com/watch?v=ZDiLgdWF0TE" style="border: var(--artdeco-reset-link-border-zero); box-sizing: inherit; font-size: var(--artdeco-reset-base-font-size-hundred-percent); font-weight: 600; margin: var(--artdeco-reset-base-margin-zero); overflow-wrap: break-word; padding: var(--artdeco-reset-base-padding-zero); text-decoration: var(--artdeco-reset-link-text-decoration-none); touch-action: manipulation; vertical-align: var(--artdeco-reset-base-vertical-align-baseline);" target="_blank">Arpit Gupta</a> about issues related to urban economics and corporate finance in helping startups to launch in cities.</p><p style="--artdeco-reset-typography_getfontsize: 1.6rem; --artdeco-reset-typography_getlineheight: 1.5; border: var(--artdeco-reset-base-border-zero); box-sizing: inherit; color: var(--color-text); font-family: "Source Serif Pro", serif; font-size: var(--font-size-large); font-weight: var(--artdeco-reset-typography-font-weight-normal); line-height: 3.2rem; margin: 3.2rem 0px; padding: var(--artdeco-reset-base-padding-zero); vertical-align: var(--artdeco-reset-base-vertical-align-baseline);">From my two years living and working in Baltimore, I saw a city with great potential whose leaders need to embrace the free market approach to help all of its current and future residents to thrive. The upcoming investments by the Biden Administration in such cities will only have a lasting impact if these cities have created "rules of the game" that increase the investment by; 1. young people investing in their skills, 2. business investment in creating new firms and private sector job growth, 3. government creating a business friendly environment and a safe, green, clean city, 4. real estate interests investing in upgrading the city's aging physical capital stock.</p><p style="--artdeco-reset-typography_getfontsize: 1.6rem; --artdeco-reset-typography_getlineheight: 1.5; border: var(--artdeco-reset-base-border-zero); box-sizing: inherit; color: var(--color-text); font-family: "Source Serif Pro", serif; font-size: var(--font-size-large); font-weight: var(--artdeco-reset-typography-font-weight-normal); line-height: 3.2rem; margin: 3.2rem 0px; padding: var(--artdeco-reset-base-padding-zero); vertical-align: var(--artdeco-reset-base-vertical-align-baseline);">For an overview of the entire book, watch this video that covers Chapter One of our book:</p><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen="" class="BLOG_video_class" height="266" src="https://www.youtube.com/embed/KrCZROoAn8c" width="320" youtube-src-id="KrCZROoAn8c"></iframe></div><br /><p style="--artdeco-reset-typography_getfontsize: 1.6rem; --artdeco-reset-typography_getlineheight: 1.5; border: var(--artdeco-reset-base-border-zero); box-sizing: inherit; color: var(--color-text); font-family: "Source Serif Pro", serif; font-size: var(--font-size-large); font-weight: var(--artdeco-reset-typography-font-weight-normal); line-height: 3.2rem; margin: 3.2rem 0px; padding: var(--artdeco-reset-base-padding-zero); vertical-align: var(--artdeco-reset-base-vertical-align-baseline);"><br /></p><p style="--artdeco-reset-typography_getfontsize: 1.6rem; --artdeco-reset-typography_getlineheight: 1.5; border: var(--artdeco-reset-base-border-zero); box-sizing: inherit; color: var(--color-text); font-family: "Source Serif Pro", serif; font-size: var(--font-size-large); font-weight: var(--artdeco-reset-typography-font-weight-normal); line-height: 3.2rem; margin: 3.2rem 0px; padding: var(--artdeco-reset-base-padding-zero); vertical-align: var(--artdeco-reset-base-vertical-align-baseline);"><br style="background-color: white; box-sizing: inherit; color: rgba(0, 0, 0, 0.9); font-size: 20px;" /></p>Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-7270859681412590322021-11-06T08:29:00.002-07:002021-11-06T08:36:56.010-07:00Infrastructure Investment Microeconomics<p> A few thoughts about the pending Infrastructure Bill.</p><p><b>What Criteria Will be Used to Allocate the Money?</b></p><p>An efficiency criteria would state that it should be allocated to those places and on those projects within such places that offer the greatest economic and quality of life impact. Before we make such irreversible investments, how do we know what these effects will be? Is the public ready for spatial general equilibrium models to guide this prospective work?</p><p>If the political process diverts $ to be spent in the districts of powerful Congressional leaders, how will economists measure the opportunity cost of such "misallocation"? This raises the true "price" of this bill and increases cynicism about the efficacy of government expenditure. </p><p><b>Who Will Oversee the Construction of the Infrastructure?</b></p><p>What would be the costs and benefits of asking the Chinese CCP to build this infrastructure for us? Their Bullet Train system looks like it has been built more cheaply and more quickly than California's nascent bullet train. I am 1/2 kidding here. A cynic would ask; "Will this infrastructure bill simply create high paying construction jobs for U.S union workers?" Perhaps that is the real intent of this bill. Will there be a competitive bidding process for garnering these contracts? Does the Boston Big Dig cost over-runs foreshadow what will happen here?</p><p><b>How Does "Better Infrastructure" Improve Our Economy's Performance and Quality of Life?</b></p><p>Here I would say that there are key complementarities. Our leaders must introduce road pricing, water pricing, dynamic electricity pricing to reflect fundamental supply and demand forces. I predict that our true gains from this Keynesian expenditure scaleup will be much greater if the pricing of this infrastructure uses our growing supply of "Big Data" to signal the dynamics of resource scarcity.</p><p>For example, Texas will suffer less from the next Texas Freeze if the grid is more reliable and more consumers are incentivized to sign up for dynamic pricing. </p><p><b>Better Data</b></p><p>I would like to see Mayor Pete in his position at the Department of Transport commit to complete transparency over which entities are getting the subcontracts to implement this work and to see the bidding process details. How will the American tax payers know if the "rules of the game" are designed to protect us from corruption and so that we get our $'s worth from the $ that is about to be spent.</p><p><br /></p><p><br /></p>Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-74087086858942025742021-10-25T05:08:00.003-07:002021-10-25T05:18:05.136-07:00A Beach Haiku<p>The Low Tide Beckons</p><p>No more Economics Talk </p><p>I will Tweet later. </p><p><br /></p><p><a href="https://1.bp.blogspot.com/-qi78ymWjCXw/YXadXnsEWhI/AAAAAAAAitw/kYZ-U3yFqpU422KOnoq6BodQbNcCVkBigCLcBGAsYHQ/s1447/facebook_1635126163703_6858216208924627441.jpg" style="margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="1447" data-original-width="1080" height="425" src="https://1.bp.blogspot.com/-qi78ymWjCXw/YXadXnsEWhI/AAAAAAAAitw/kYZ-U3yFqpU422KOnoq6BodQbNcCVkBigCLcBGAsYHQ/w488-h425/facebook_1635126163703_6858216208924627441.jpg" width="488" /></a></p>Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-81858849628022101112021-10-24T05:11:00.000-07:002021-10-24T05:11:26.469-07:00Incorporating Local Public Health Dynamics into The Rosen/Roback Spatial Equilibrium Model<p> Imagine if there is an infectious disease that spreads within cities but not across cities. Throughout the COVID crisis, the city specific infection rate has varied across cities at each point in time. In a city facing a rising infection rate, people can adapt by either engaging in costly self protection (self isolating) or through public health interventions --- such as vaccinating the local population. In this case, public health substitutes for private health protection investments. To be safe, one can either isolate and not be vaccinated or continue with life as usual and be vaccinated.</p><p>Suppose that there are two generations, the young and the old. The old have already chosen where to live and they don't move across cities. The young must choose where to live their adult lives. They have full information about each city's productivity, amenities real estate prices, and quality of life and one element of quality of life is local infection risk. There are other quality of life factors such as air pollution and local climate and topography.</p><p>In spatial equilibrium, young people must be indifferent between living in the different cities. Those cities with higher death risk will feature lower housing prices. The old's quality of life will rise and fall with the infectious disease risk but the current young will be indifferent. The young will engage in dynamic programming and will anticipate that they are "locking in" to a given city and they will do their best to forecast each city's quality of life in the future when they are old. If there is a city whose quality of life is expected to decline (perhaps due to persistent infectious disease risk), then they will demand even lower rents to compensate them for moving there now.</p><p>Economists should note that in this model public health expertise represents a city production function parameter. Effective public health in a city lowers the marginal cost of a city providing a low infection rate for everyone in that city. Land owners in the city benefit from such location specific productivity. Increases in such productivity raise the well being of the old who are "stuck there".</p><p>For a more formal discussion of these issues in a different setting,<a href="https://ideas.repec.org/p/nbr/nberwo/26295.html"> read my co-authored 2019 NBER paper.</a></p><p>In <a href="https://ideas.repec.org/a/aea/aecrev/v105y2015i5p564-69.html">our 2015 paper, </a>Dora and I document the historical mortality gains that cities achieved back in the 1930s by investing in clean water infrastructure. </p><p>If infectious disease spreads across cities, does spatial compensating differentials theory offer useful ideas? Are we compensated by labor and real estate market for taking the risk of moving to an increasingly risky city? If every spatial market faces the same rise in risk, then the answer is no. If people are unaware of these changing risks, then the answer is no. </p><p>Finally, now suppose that only 50% of the population believe that public health efforts have a causal effect on improving one's health. For example, suppose that 50% of the population do not believe that vaccines are effective. In this case, a new type of spatial separating equilibrium will emerge as like minded people will move to the "safe cities" and follow the advice of the public health experts. Real estate prices may not rise much in these cities if the young who do not adhere to the public health expert advice do not want to move to those cities. </p><p>This Tiebout separation (based on differences in beliefs about the effectiveness of public health expertise) is a c<a href="https://ideas.repec.org/a/eee/reecon/v72y2018i2p251-262.html">ousin of my 2017 paper. </a></p><p><span style="background-color: white; color: #333333; font-family: Asap, sans-serif; font-size: 16px;">Climate change will increase the risk of temperature extremes. Induced innovation could offset some of this threat. This paper explores the demand and supply for climate adaptation innovation in a market economy. Such innovation attenuates the past relationship between the population death rate and extreme heat. Climate change induces this innovation because the rising temperatures increase demand for self protection products and for profit firms respond to these incentives. We then augment the model to introduce “climate skeptics”. Such skeptics reject the claim that the world’s average temperature is rising and thus do not increasingly demand adaptation products. In an economy featuring no government to enact optimal taxation, we quantify how rational agents are affected by the presence of climate skeptics.</span></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p><p><br /></p>Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.comtag:blogger.com,1999:blog-15200437.post-3861715912739495862021-10-07T12:35:00.004-07:002021-10-07T12:47:04.250-07:00Adverse Selection in Car Insurance Markets: What Happens When Car Sellers Offer Insurance to Good Drivers?<p> My wife and I own a well known Electric Vehicle that monitors our driving in Southern California. The car company knows how many miles we drive and the car company knows that Dora is a safe driver based on her average speed and the braking she engages in and the fact that she doesn't engage in stop and go driving. While I have a driver's license, I do not drive.</p><p>Six months ago, I asked Dora; "Why doesn't Tesla sell car insurance? We would get a better deal from Tesla because it knows that you are a great driver." The Wall Street Journal r<a href="https://www.wsj.com/articles/gm-wants-to-not-only-sell-cars-but-insure-them-too-11605708000">eports that GM is now selling car</a> insurance. As usual, I am ahead of my time as I can see the future!</p><p>An interesting self selection issue will now arise. If you are the boss of a stand alone insurance company, how should you price insurance to the <b>select </b>sample of Tesla and GM car owners who chose not to buy insurance from those companies? Do you see that these are the risky drivers? As stand alone insurers raise rates on these folks, will a death spiral emerge? I think the answer is no because all drivers must be insured. The "sick" drivers will no longer be quoted low rate and they will pay more for their bad driving. If driver "quality" is a choice, then these drivers will have an incentive to improve their driving and our roads will become safer due to the rise of Big Data and the risk pricing that GM and Tesla and other new insurers can engage in.</p><p>Death to the pooling equilibrium! In the case of health insurance, I understand why a pooling equilibrium offers cross-subsidies to sick people. In the case of driving insurance, the pooling equilibrium hurts society because we want bad drivers to have an incentive to invest in becoming better drivers. In the case of health insurance, yes we want people at risk of getting very sick to engage in healthy habits but this "transformation" is likely to be more challenging (given genetics) than transforming a bad driver into a safer driver. </p><p><br /></p>Matthew E. Kahnhttp://www.blogger.com/profile/13604821377978159962noreply@blogger.com