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March 14, 2006

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Raw Data

Parking?

Parking is certainly one of the key factors for rental decisions. By and large, parking comes with purchase so I don't think it will be a factor unless you mean enforcement of on-street parking rules.

Footloose businesses certainly look at laws -- look to Nevada's distribution centers. Retail business looks for rooftops and I think largely ignore local law so long as they can get a permit. Individuals simply look to far more general "quality of life" issues though tight land use laws are a big bonus. I don't think he'll find any individuals looking at statewide laws.

That's just a guess.

Anup Malani

Doug is right that some of the value of the law-as-amenity will be capitalized into other local markets. To that extent looking only at housing prices and wages will underestimate the welfare effect of a law. I offer two caveats, however, to his argument.

First, the degree of capitalization depends on the degree to which a market is local. Housing is the most local market because one cannot import land. The second most local market is labor. One can import jobs, but it is a long-term adjustment. The demand for local services such as dry cleaning will be reflected in the price of local jobs; therefore my wages measure pick part of this up. As for foodstuffs, the only concern is unexpected changes in demand for perishable products. An increase in this demand will raise local prices. But once the change is known, producers will adjust by sending greater supplies to the site of local demand. National prices will not change because demand for perishables will have fallen in the neighborhood from which the movers came.

Second, as a relative welfare measure, my proposal may be robust to this underestimation. Suppose one wants to compare the welfare effects of two different laws A and B. My measure would compare the sum of the increase in housing prices and the decrease in wages under law A with the analogous sum under law B. Whichever law has the greater sum is the superior law. Suppose each sum were an underestimate, so long as the underestimates were the same or proportional to the sum, my relative measure would still fly. So the question is, when is this the case? It is the case so long as the population that likes each of the two laws has the same unconditional demand function for other products in truly local markets. So, for example, if law A appeals to poor people and law B to rich people, and the poor people consume a lot more potatoes, then the underestimate due to my omission of potato prices will affect my measure of law A more than law B. My measure would be biased against law A. I doubt, however, that the magnitude of any such bias will be determinative because I think capitalization into housing and wages is so much larger than capitalization into any other markets.

amalani

In response to Raw Data:

You are certainly correct about parking. I will look into that. But my initial thought is that my measure of housing value (really land price) picks up the increased demand for parking for two reasons. 1) Much of housing I look at includes parking and I know when that is the case. 2) The same land can be an input into parking and into housing. Thus an increase demand for parking will raise the price of land for housing in a way that should capture the effect of an increase in demand for parking. The only tricky issue is that when you try to come up with an aggregate welfare measure using my approach, you have to sum across all land (and all jobs). But that sum must include land that is used strictly for parking.

I am conflicted about what to do about commercial land. On the one hand one might argue that the utility of firms does not enter social welfare. Any value a firm gets should be attributed to its stakeholders. But that should mainly be picked up by wages and demand for local land. That said, a long term adjustment to a new legal amenity, after the immigration of additional workers (driving down wages), is the immigration of new business firms (attracted by the lower wages). Those new firms may raise wages. Part of this is picked up by aggregating across workers (each worker experiences a smaller decrease in wage but there are more workers over which to aggregate these welfare gains). But the new firms also raise the price of commercial real estate. I have to give more thought to how that affects the welfare calculus. (It may not.)

If your point about commercial property is that I look at commercial land prices to judge welfare, I then have to take a stand about whether firms are part of social welfare. By the way, your argument is not unrelated to one by a famous economist (I want to say Nordhaus, but I'd have to confirm) who suggested in the early 1970s that one ought to value amenities (he was not speaking of laws) by their effect on equity prices.

Thanks for your comments.

Raw Data

Anup Malani.

I find your idea intriguing because I have long understood that at a national level, one of the reasons for the success of The West -- one of our real economic resources, in fact -- is our legal system. With all its flaws and inequities it offers an extremely high degree of personal autonomy, security of contract, freedom of speech (from which flows reliable investment decisions), relatively honest bureaucracy etc etc.

Such a framework -- with honest courts at the very core -- is a true national resource. (That's why the insistence of groups like the ACLU on strict adherence to procedure is really very 'pro-business.')

Your application of of "law as economic resource" to the state level is fascinating, even as I am dubious. With the exceptions of footloose business (and only certain types such as distribution) I don't think such steering to "good law" actually happens at the level of the firm (decisions about corporate headquarters aside e.g. Delaware) much less to the individual (where land use for people who have choice is critical.)

Anyway, I will try to wrap my mind around your latest comment as it frames the issue in a manner with which will take some time for me to digest.

Anup Malani

Raw Data:

I am not fundamentally attached to the idea of law-as-amenity at just the state level. The only reason I look for state laws is because 1) my idea needs empirical support to be persuasive and 2) state-level law data sets are easier to construct. If I can find local laws at the metropolitical statistical area (MSA) level that affect moving, I can also use them to provide an empirical demonstration of my proposal. My housing data (American Housing Survey) is anonymized to the MSA-level therefore I cannot distinguish the effect of laws at the sub-MSA level.

I think the question of the relation between the level (national, state, MSA, town) of a law or judicial decision and housing prices/wage is an empirical one. I have priors, but no full theories on why level matters. A complicating factor is that different types of laws are adopted at different levels. E.g., zoning laws are almost always very local; tort laws are almost always at the state level; and nearly all important bankuptcy laws and free speech laws are at the federal level. Yet each of these types of laws can significantly affect welfare and, not implausibly, decisions to move.

Ultimately my point is that one should be able to get a pretty good measure of wilingness to pay for a law or judicial decision, whatever the level at which it is adopted, by looking at the increase in housing prices and decrease in wages.

Raw Data

The older and opposite approach -- changing law to one's benefit, rather than moving to more favorable law -- is nicely illustrated in this WSJ article:

http://tinyurl.com/j7wr3

"As the real-estate market begins to cool, a growing number of homeowners are seeking to boost their property values by getting their neighborhoods designated as historic districts."

Chenyun Zhu

Dear Every One,
How do you think of Pareto Model?
Sincerely
Chenyun Zhu

tedm

I am sympathetic to the general project. However, two big practical problems.

1) Diversity of preferences and product differentiation. Some cities have multiple state jurisdictions (DC has Washington/Maryland/Virginia while Dallas just has Texas). Thiebout testing ground? Hold on.

If people have diverse preferences, the effect can be complex. Suppose in a unified area, Law A preveails and results in higher property values then Law B. However, B-lovers' demand is depressed and the property values are not as high as they could be. Why? Because if a jurisdiction could offer Law B while the rest continued to offer Law A, the sorting mechanism can raise the property values in all constituent areas. Parents of grade-school children don't like drunks milling about near schools - ah zoning.

Think of the old Almond Joy commercial. Sometimes you feel like a nut, sometimes you don't.

A finding that property values are higher in the portion with Law A than Law B might erroneously be interpreted as implying that the area with Law B would have higher property values if it adopted Law A. Not necessarily the case.

2) Even if you find a law that problem (1) could not apply, would the effect of the law be big enough to shine through all the noise created by other determinants of property values? Economic opportunity may swamp a lot of mildly annoying laws.

Timothy Zimmerman

Do you have any idea how your model would work when applied to so-called "smoking bans"? I live in a city that is entirely smoke-free indoors (with very few exceptions) and I was curious as to whether or not these laws are "good" in the sense of your paper.

Certainly, some people will choose to stay home because they do like to smoke, but alternatively some will go out to restaurants again because they don't have to be exposed to secondhand smoke. Initially bar owners complained, but I know some restaurants have said that in the long-term their business is up due to returning customers. So it would seem that jobs/wages are increasing, but I have no idea about property values. Having lived here and seen how nice it is, I would certainly put a premium on the opportunity to live in a similar community in the future.

Anup Malani

Thanks all for the comments. I was away for a week so my responses are a bit tardy. But here they are:

Raw Data: This is an interesting extension. There are 2 ways to obtain a better legal amenity: move to a jurisidiction with your preferred law or get your current jurisdiction to adopt your preferred law. William Fischel in Homevoter Hypothesis argues the latter route only works at the local level. My current draft relies on this argument and examine state-level laws. But he could be wrong (e.g., med mal reform). An alternative solution is to argue that the difference in house price between your home jurisidiction and the one you are going to move to is the difference between the value of having your preferred law for sure and having an option to get your preferred law. The option has a strike price -- the cost of successfully lobbying for your preferred law -- and the higher this strike price the higher the incremental value of having your preferred law for sure. Under this view, the endogeneity of laws is already and appropriately factored into the change in house prices.

tedm: 1) Good point. My solution is to employ the adjacent jurisidtions' laws as treatment variables. Operationally, I have MSA level data. An MSA can cover multiple states. I rank the states covered by population. Then I match states to laws. So my regressions look like:

house price in MSA = f(law in most populous state in MSA, law in 2nd most populous state in MSA, law in 3rd most populous state in MSA, other stuff)

By itself, this model captures sorting but not diversity. Here is an idea to capture diversity: construct a HHI-type index with each law treated as a firm. Each law's market share would be the population covered by the law as a percentage of the total market share of the jurisdiction. HHI = sum of squared market shares. Higher HHI indicates higher concentration and thus lower diversity. What do you think?

2) That is an empirical question, which is why I am spending a lot of time gathering housing price and law data. The real danger is spuriously finding a correlation between laws and housing prices/wages. I am trying a number of ideas to avoid this; the most promising is to interact laws with subsets of a jursidiction's population that would want the law more. E.g., does a criminal law have a different effect in inner city v. suburb.

Timothy Zimmerman: My method should work in a straightforward fashion with respect to smoking bans. I have not applied my method to these bans yet, but that is mainly because I do not have the MSA-level data on these bans yet. I am not sure what the net effect will be; my prior is that it is positive on housing prices and negative on wages, i.e., positive on welfare. But I am concerned that part of that effect may be driven by the fact that my measure is biased towards the preferences of rich people and by my belief that rich people prefer a smoke-free environment while relatively more poor people prefer a smoking environment. I could be wrong about the latter and would not be altogether surprised to find that smoke bans have negative welfare effects in the short run. In the long run, however, I expect the health effects to dominate and manifest a positive welfare effect in the data.

Kimball Corson

As a welfare measure, WTP would be great if income and wealth were equally distributed or neither was particularly scarce. But this assumption fails miserably, especially given that we are dealing with the biggest ticket purchase item and the price of houses still rising. That is the reason I believe that your proposal really involves not true market operation or rationing, but rather rationing by legislative fiat, using markets to favor the richer relative to the poorer. In short I have problems with your assumption that WTP is a good welfare measure in this context which you earlier and clearly stated to be such.

What I find most interesting about your analysis is that, if tipped on its head and used backwards, it affords us with a good means to identify class legislation as opposed to legislation intended to benefit us all. Now that is interesting. In other words, we can take your analysis and apply it backwards to determine which ordinances were intended to benefit us all and which ordinances entail rationing for the better off by legislative fiat using markets.

lkessler

Anup,
I'm a bit confused. If I dispute the premise of your paper that people move places for the law and then take jobs, where does that leave us? Is that part of the potential noise you cite skeptics would point to that would drown out any measurable effect? I find it bizzare that you would even posit in the first place that people would move somewhere for the existence of certain laws, before they consider their employment. Certainly no poor person moves somewhere for laws rather than just for jobs. And I've never met a rich person who moves somewhere based on the local laws like the examples you give in your paper.

Also, what about considerations of a race to the bottom? That this is all some kind of zero sum game we are playing? If State X sets of a corporate tax scheme that entices a major business to move there, and housing prices go up and competition for jobs increases and wages fall, assuming population is constant, shouldn't you be considering the drop in housing prices and the increase wages in State Y, from where all the people are moving in your calculation of utility? Considering transaction costs, it would seem to me that utility would always go down anytime one state attracts people through certain laws at cost to another state. Simply examining localized utility seems usless to me if the increase in localized utility likely comes at cost of a decrease in utility elsewhere.

I think your paper may be fodder for those of us who find certain rational actor assumptions to be absurd. Most people can't name their representative to congress let alone the status of tort reform in their community.

lkessler

Relatedly, how do you address causation? If you are looking at housing and employment/wage data, how can you even begin to think there might be a causal connection between the existence of certain laws and the changes in housing and wages? Would that consideration fall under the "noise" problem again? Unless all other factors that are involved in why people move to or stay in a particular community are held equal, the physicist/hard scientist in me is very skeptical of the lack of scientific method of the dismal science. The number of factors that go into these sorts of decisions are very large, and at first glace, the existence of particular laws would be very low in weight in any person/family's decision to move or stay somewhere. Nonetheless, the complexity of these decisionmaking functions makes me very skeptical that you can say anything about measuring a law's utility based on the wage and housing citeria.

Further, as is always my fear with the dismal science, you must admit that your approach would allow justifying a terrible law when the utility of the country or world as a whole is measured, just by looking at highly localized effects, which may be positive in a certain localized case.

I notices in my time at U of C, economists can me myopic in concentrating on just one local potential energy well and have difficulty acknowledging there my be other even deeper non-localized potential enery wells in a given function that can only be accessed through a significant decrease in utility first (what physicist call an activation energy - incurring costs or expending energy to get over a hump, so to speak, to access an even deeper potential energy well/ equilibrium)

lkessler

Point of my babble above being that a law that first results in lower real estate prices and higher wages might actually have a higher utility over some time integral if the apparent initial decrease in utility (by your measure) actually allows for the possibility or results in the evetual increase of utility down the road.

For instance, an environmental regulation may have an immediate negative utility but a few years down the road could result in levels of increased utility that simply weren't achiveable without it (and the initial costs of implementing it) in the first place.

You dig what I'm saying?

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