Valuing Laws as Local Amenities

I recently started a paper which argues that the value of a law should be judged by the extent to which it raises housing prices and lowers wages.   This may seem an odd way to assess the welfare effect of a law.  After all, higher housing prices and lower wages are thought to be bad outcomes, not good ones.  But the proper way to understand these changes is as signals of positive outcomes, not positive outcomes themselves.  They indicate that something good has happened in the community.  Housing prices go up because more people want to live there.  Wages go down because more people want to work there.  Phrased more formally, higher housing prices and lower wages are how markets ration an attractive local amenity.  Indeed, the increase in housing prices combined with the reduction in wages provides a measure how much people are willing to give up to enjoy the amenity.  Conventional economic thinking recognizes this when it comes to estimating the social value of a new park or a better school.  The same logic, I argue, applies when the amenity is anything from a better tort system to smarter rules regarding capital punishment.

This is, of course, not the standard practice.  Under the conventional approach, the welfare effect of a law would be measured by evaluating the law’s effect on specific, related behaviors.  For example, a three-strikes law would be evaluated by its effect on homicides;  a unilateral divorce law by its impact on rates of domestic violence  or divorce;  and a tort reform by its impact on insurance premiums  and accidents.   These are certainly sensible metrics for judging the laws at issue.  But none is as effective at measuring the welfare effect of a law as its impact on housing prices and wages. 

First, the housing and wages approach employs a more direct proxy for welfare.  The conventional approach tells use how much, e.g., the felony-murder rule reduces robbery,  but it does not tell us how much people value that reduction in robbery.  Yet that is the very strength of my proposed approach.  The increase in housing prices and the loss of wages reveals how much the marginal resident who moves to a community is willing to pay – in terms of lower non-housing consumption – to be subject to a new law in that community. 

Second, the conventional approach often provides an incomplete picture of any given law.  Frequently, relevant implications are too hard to measure or are unexpected, and are therefore left out of the empirical analysis.  For example, a typical study might ignore the expressive benefits of an anti-discrimination law or the placebo effects of corporate governance reforms  because these consequences are so hard to quantity.  With respect to unexpected outcomes, until recently scholars studying abortion rights overlooked the important effect of abortion rights on crime rates.   The conventional approach also tends to ignore the enforcement costs of laws, whether direct (higher property taxes) or indirect (reduction of other government services).  The housing and wages approach does not suffer these omissions.  It provides a measure of the net benefits of a law, accounting for intangible benefits, unintended consequences, and enforcement costs. 

To be clear, I do not contend that the housing and wages approach offers a perfect measure of welfare.  It has important limitations.  From a normative perspective, it gives disproportionate weight to individuals with greater income.  It ignores individuals – such as prisoners and military personnel – who do not participate in the housing market.  And there is some leakage when evaluating, for example, laws which convey benefits or impose costs on other jurisdictions.  But, for the reasons given above, it is a better second-best than the conventional approach to valuing the within-jurisdiction benefits of a law, as well as competing methods for estimating the willingness-to-pay for public goods.  Moreover, so long as the limitations inherent in my approach affect all applications equally, it can still be used to conduct relative welfare analysis or rank different legal reforms.

Skeptics will surely wonder whether there is too much noise in housing and wage data to identify the (likely small) effects that any individual law has on those outcomes.  But this is an empirical question and the paper offers an empirical answer.  It examines the effect of six types of laws (tort reforms, abortion access laws, no-fault automobile liability, unilateral divorce laws, capital punishment, and health insurance mandates) on local housing prices and wages.  Data on housing prices and characteristics are drawn from the American Housing Survey.  Data on wages are from the Current Population Survey.  Finally, data on laws are from recent studies by Jonathan Klick, Thomas Stratmann, Paul Rubin, Joanna Shepherd, Leora Friedberg, and RAND.  My preliminary results suggest that tort reform may reduce local welfare and that executions and diabetes coverage mandates may raise local welfare.  (I stress, however, that these findings have not been demonstrated robust and should be taken as a proof-of-concept for my methodology rather than as policy recommendations.)

The purpose of this post is to ask readers two questions.  First, can you tell me your criticisms of my argument?  My draft (which you can find at http://www.law.virginia.edu/home2002/pdf/malani/amenity.pdf, esp. at pp. 15-19) already has a number of criticisms.  I’d like to know if you have others.  Second, and more importantly, can you think of examples or cases where someone has moved from one jurisdiction to another based, in part, on the laws in those jurisdictions.  Examples where people at least know or inquire about the laws in either jurisdiction will help.  For instance, has your realtor ever told you about a local law when you looked at a home?  The main criticism I get is that people are skeptical that legal rules/decisions play a role in peoples’ decisions to move.  My empirical evidence, however, suggests there is a correlation between various laws and housing prices and/or wages.  I want to figure out if what I’m finding is merely spurious correlation.  Thanks in advance for your feedback.

Comments

[David]

I guess this wouldn't apply internationally, where people think about the laws in competing jurisdictions not infrequently when pursuing, say, asylum. And if Ed Glaeser is right, it certainly would encourge a great deal of zoning regulation - our finest set of laws, huh, in that they're most directly related to raising housing prices? Might also support right to work laws as similarly far-sighted.

It's a bit less specific than you'd like, but you shouldn't have much trouble finding opinions recounting moves for divorce and to take advantage of Texas and Florida homestead exemptions.

[slevmore]

The zoning point is a good one, isn't it? If a jurisdiction restricts housing in some way, then prices will rise. It is true that people may decline to move into the jurisdiction because of the high real estate prices, but it is easy to imagine that the housing constriction will have a more dramatic effect. Similarly, a law which had bad welfare effects but in the short run benefited employers at the expense of employees, might depress wages and fool you, so to speak.

[Dan Johnson-Weinberger]

I'm not sure if laws create culture or culture creates a legal regime, but I do know of one group that has been making housing decisions based on perceived and/or actual tolerance of government, business and citizens: homosexuals. There's clearly an ongoing movement of homosexuals from smaller towns to large cities (or smaller towns to more cosmopolitan municipalities), and this movement might have something to do with your idea. Cities like Chicago that offer domestic registry, insurance benefits for domestic partners of employees, city-financed recognition of the gay community (the rainbow cones on Halsted) are likely to attract more homosexual residents that those that do not. I'm not sure if that's of any value to your research, but it's good to see you back at Chicago!

[Commenter]

A few questions:
- Why do you use wages, instead of total compensation?
- Couldn't a good law raise wages in a way that would offset the increased desirability of living in the community? For example, if a law that led to substantially superior education, or a law providing business incentives, attracted significantly higher-paying jobs, couldn't that easily outweigh the wage-depressing effect of the community being more desirable? How do you control for these effects?
- Contrariwise, couldn't bad laws result in lower wages, like one that imposed higher taxes to subsidize digging holes to China or like unproductive projects? Or even something as crass as imposing higher taxes to generate more revenues from which the city leaders skimmed off the top? How do you differentiate decreases in wages that come from bad laws?
- Can't increased or decreased housing prices also come from bad or good (suboptimal or wealth-maximizing) laws, respectively? Increased, from inefficient land-use restrictions? Decreased, from repealing such laws?

[David Sucher]

This post is extremely imaginative and I commend you for the general concept. As a large-scale historical matter it seems to be intuitively true: nations which protect contract, for example, attract business.

Nonetheless, I am not quite sure if I agree with it at the scale of the family unit. The flaw has already been mentioned: "... can you think of examples or cases where someone has moved from one jurisdiction to another based, in part, on the laws in those jurisdictions?"

Not really from personal experience except that very few women I know would voluntarily move to South Dakota these days or gays to Iran.

Beyond minorities which seek more tolerant communities, locational choices are much more of a "gestalt" thing in which one buys into a whole set of social arrangements.

People move to my area -- Seattle -- because of images which are pretty far-removed from specific laws especially since the ones you mention -- "tort reforms, abortion access laws, no-fault automobile liability, unilateral divorce laws, capital punishment, and health insurance mandates" -- are statewide.

The real factor in housing prices (in a positive way) are land use and environmental laws. People with choice (i.e. some degree of money) somewhat consciously consider the land use laws in deciding where to move, especially when they are retiring; more restrictive would be better. (Sometimes this "law" can be the private law of homeowner's associations.) In Seattle, generally speaking, the tighter the land use law, the more desirable the municipality for residential use because tight laws provide security. Very few people intend to develop their land so they don't care if it's tough to do.

[Martha J. Luke]

I will comment on the basis of historical evidence and please forgive my vanity, yet , experience is existence ( without spcific reference to my personal research of Palul Sartre and philosophy of absurdity being denied legal assistance by practicing attorneys who referred to my research, which they too knew from my spirit, saying its impossible to represent and you must live through it because of the absurdity).
and laws continue to be violated in every location I am with changes of law and more legislation. Now thirty-one years with strange affiliations with the Presidency and specifically twenty-two with direct relatvity, and continued loss of earnings, housing and experiencing more crime (did someone refer to what was state crime being felonies)and of course that was debated in congress and portrayed in the media in 1995 and the special agent to the white house, who I reconnected with in 2001 had experienced a nice family plan with U.S. law and may have advanced to retirement and pensions.

After regaining my memory in 1994 and not succeeding in obtaining help with political assylum, I'v sought freedom in three to four more states and some other locations in route. In each location there has been a quick change in life, as well as, environment and laws or implementation of laws with change in law makers and more legislation, yet, the laws that existed in 1975 and 1983, dating to 1871 and since the sixties continue to be violated in violating me. And with even a simple question of fact and fraud with regards to a U.S. publication I received from Mac Collins' office pertaining to ratification of all states to womens rights which was not ratified by all in 1975,

what does remain as fact is loss of my procreativity or ability to reproduce and continued theft from my spirit without persons helping with legal remedy and my civil liberties continously violated, while I subsist with approximately only $12,000/year, experience continued descrimination,harrassement and am denied access to U.S. appropriated programs and am threatened with and by "more losses and crime", not knowing the extent of the lives lost or debauched at this time which approaches assault as threat of geneocide from the faces and dismembered limbs that I viewed in 1997.

The most horrific to me is that being in locations desired for amenities such as culture and education there is a persistent refusal to receive me in person and honor established policies for acceptance, the law then portrayed by the local media becomes a matter of funding without online education and first amemdment rights or protest.

I did not successfully accomplish protest in Washington, D.C. in 1999 because of my desire to remain legal and obtain a permit which was not permissable. The Washington Post noted a comment about AL GORE, his incredible secret service hulk and my comment to a guard at the gate to the whitehouse.

You may know the rest of the story, the letter requesting an executive order composed in Madison, Virginia during Thanksgiving was taken in New Mexico, when my civil liberties were violated there the first time and Presidnet Clinton visited the location where I was "shipwrecked" at Crown Point and Shiprock.

I was preparing to attend law school in 1985
but was prevented and denied that opportunity because of what began that same year. For eleven years I was denied financial stability when violated in the corporations with their welfare and then violated in county and city with violation of civil liberties and constitutional rights.

Being near the University of Florida where the best amenity is civility, I've sought to regain what I was prevented from returning to attain in 1997 a PhD, while that location was changing. Yet, I am not received personally, therefore knowing the reputation of the University of Chicago I ask your assistance in being accepted there.

Sincerely,

Martha June Luke

[Kimball Corson]

Amalani writes:

“. . . the value of a law should be judged by the extent to which it raises housing prices and lowers wages. . .”

"Phrased more formally, higher housing prices and lower wages are how markets ration an attractive local amenity."

I respond:

Interesting theory, but I see problems:

1) Is there not an ethical problem with passing local laws to augment the desirability of an area so that the rich can move in and the poor are driven out? This reminds me of the 'Negro removal' er 'Urban Renewal' projects that used to surround the Univ. of Chicago.

2) How desirable is it for the existing neighbors to have the same, but now more expensive homes and pay higher property taxes on them but have a lower paying jobs?

3) Are the existing neighbors just bought off with capital gains to leave and make way for the non-working rich to get their homes?

4) Is this really market rationing or is it rationing by legislative fiat, using markets?

5) Is such a law made more valuable relative to others by causing high home prices and lower wages or is it instead made more base and unethical relative to others by those outcomes?

6) Are such local laws really ethical in these circumstances?

7) Should those who pass ordinances be in the business of class legislation?

[Kimball Corson]

I did not know her background and still don't know much of it, but perhaps someone at the Univ. of Chicago should perhaps listen to and interview Martha Jane Luke. Her instincts on why and where to turn at least seem good.

[Kimball Corson]

Sorry, June, not Jane Luke.

[Chenyun Zhu]

Convention is a dense cluster of popular-accepted opinions. Within a normal thinking pattern and psychological reflexity, people would rather make comparation between vertical history index and give a hug to easy yardstick and swift return. Weak correlation analysis may help us ponder horizontally and discover a category of fundamental factors neglected during legislation and survey.
My questions arise after review.
1. Based on ranging market adjustment and governmental macro-control into your consideration, your essay is a gauge on estimating law effect through observing welfare or a gauge on mercantile operation under legal ordiance?
2. Could we focus on yardsticking general law applied in a society of specific culture through rippled effect, negative or positive, on civilians' capitalized amenities while considering territory margin? Shall we launch a clarified phenomenon to display that core value conflicts cannot be solved via means we are familiar with?

[Kimball J. Corson]

Chenyun writes:

"My questions arise after review.
1. Based on ranging market adjustment and governmental macro-control into your consideration, your essay is a gauge on estimating law effect through observing welfare or a gauge on mercantile operation under legal ordiance?
2. Could we focus on yardsticking general law applied in a society of specific culture through rippled effect, negative or positive, on civilians' capitalized amenities while considering territory margin? Shall we launch a clarified phenomenon to display that core value conflicts cannot be solved via means we are familiar with?"

I respond:

My take on his first point or query is, based on my own comment above, we cannot be dealing with welfare effects properly because too many conflict and we have no objective weighting mechanisms for assessing net outcome. However, if many more are benefited than injured, cannot we simply say that is typical of the democratic process and move on? The majority rules. I think the analysis is much more a manipulation of market outcomes by the use of local law or as I said manipulation by government fiat of local market mechanisms.

On Chenyun’s second point, why should such manipulation by government fiat of market mechanisms be limitet to a local ordinance and market only (unless it is to minimize the conflicting welfare effects)? What prevents generalization of the concept, assuming we are up to the work involved?

On Chenyun’s last point, why bother? In a democracy, may not a majority
or their elected representatives pound up on the minority all the time, with the implicit assumption being individual welfare effects are equally positive or negative or those in the majority are positive and greater.

[Raw Data]

I am amazed that this post hasn't received a great deal of comment.

[Anup Malani]

A few general points in response to comments above:

1) My approach (increase in housing price plus decrease in wage) only picks up willingness to pay (WTP). One can certainly criticize WTP as a measure of welfare. But assuming WTP is a valid measure of welfare, I think I can defend my approach as a practical approach to welfare analysis of laws.

2) It is true that my approach fails to dock racist laws. I.e., a law that raised housing prices because it discouraged blacks residents would could the same effect as a law that raised housing prices because it attracted resident irrespective of race. That is an important flaw. My approach should not be the only apprach for valuing laws. Laws with racist or other unethical overtones should be independently judged on those grounds. But many laws do not have this problem, e.g., a mandatory auto insurance law. (I am assuming that unintended disparate impacts do not count as an immoral overtone.)

3) I agree that laws most closely related to property have the most direct affect on housing values. E.g., zoning laws. Indeed, economists have previously noted that zoning, rent regulations, property taxes, etc., are capitalized into housing prices. My goal, however, is to argue that even laws not closely related to property can be judged by their effect on housing and wages. So I am particularly interested in examples of laws outside of property that may be a consideration when people decide to move. They need not be decisive, but a non-negligible consideration.

[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 the price of housing, and 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. In short I have problems with your assumption which you clearly state to be such. Your second point above follows, I believe, directly from this assumption (WTP is valid welfare measure) and is subsumed by it.

Your third point, however, is free standing and interesting in and of itself, regardless of your thesis, because it affords us with a means to identify class legislation as opposed to legislation intended to benefit us all. Now that is interesting.

[Kimball Corson]

In other words, we can take your analysis and apply it backwards to determine which ordinances are intended to benefit us all and which ordinances entail rationing by legislative fiat using markets.