A book that changed my life

"We believe that the confounding of the aggregate with the individual is as dangerous as it is pervasive...."  Page 81.

Apartments, Energy and Bad Incentives

I am spending this academic year working in Washington working at HUD, so I am renting an apartment here.  When I signed the lease, I understood that I would pay utilities; what I didn't understand, because I did not read the lease carefully enough, is how I would be charged for utilities.

Even though I live in a professionally managed building that has something like 400 units, and even though each unit has its own circuit breaker the units are not metered individually.  Instead, utility costs are allocated on a pro rate basis based on unit square footage and number of residents in the unit.

Since moving into this place, I have been very conscientious about setting the air conditioner at 80 degrees F. before leaving the apartment for the day.  I will do my best to continue to do this, but the fact is, my principal motivation for doing so was thinking that I could reduce the very expensive cost of cooling an apartment in the hot DC summer.

Of course, as one of 400 units, my influence on electricity usage for the complex is small.   There is essentially no financial reason to avoid blasting the AC all day long.  It must be the case that how one consumes air conditioning has a large impact on how much one spends on air conditioning.  In fact, people who like Bikram Yoga could drive their air conditioning costs to nothing.

A Google search on the cost of individual metering implies that the cost of installing meters for electricity would be about $300-$500 per unit.  Summer electricity costs in my unit are about $100 per month, so if price incentives lead to a 10 percent saving, each unit could save about $60 per year on electricity (I am applying the savings to six months).  Beyond this, of course, energy use produces negative externalities, so the social benefit of metering would be greater than the private benefit. This implies the benefits of metering exceed the costs. [If I am completely wrong about either the cost of metering or the savings arising from it, I would be happy to hear about it].

So why don't landlords do this?  The answer might be that they can't get enough extra net rent from tenants to justify paying for metering.  The only private cost they bear is not being able to charge as much rent as they otherwise might.  It might be worth doing serious analysis to determine the social benefits of metering in the context of individual apartments, and whether such metering should consequently be subsidized.

   

LA has zoned itself out of the ability to house its residents (h/t Matthew Glesne)

Once upon a time, the zoning in Los Angeles would have allowed for 10 million residents to live within its municipal boundaries.  Greg Morrow, in his UCLA dissertation, "Homeowner Revolution: Democracy, Land Use and the Los Angeles Slow Growth Movement 1965-1992," documents how this was eroded over time:

So LA really did create a moat around itself and pulled up the drawbridge.  For those of us who think the blessings of cities should be shared widely, this is a shame.

It is hard to feel urban form sometimes.

I have spent a fair amount of time in Sao Paulo over the past 3-4 years, and always thought it sprawled more than LA, because it takes forever to get from one side of the place to the other.  So was I surprised when I went to Google Earth and looked at both of them from the same elevation.

Here is LA:

Now here is SP:

It is far more compact.  Metro LA has about 18 million people; SP has about 20 million. But it takes about 2 hours to get from Santa Clarita in the west to San Bernardino in the east--the distance between the two is 85 miles; it can take four hours to go just 30 kilometers in SP.  Sao Paulo feels much larger to me.

Should Finance Departments Pay Pigou Taxes?

The Economist leads me to an article by Stephen G Cecchetti and Enisse Kharroubi:

 

The purpose of this paper is to examine why financial sector growth harms real growth. We begin by constructing a model in which financial and real growth interact, and then turn to empirical evidence. In our model, we first show how an exogenous increase in financial sector growth can reduce total factor productivity growth.2 This is a consequence of the fact that financial sector growth benefits disproportionately high collateral/low productivity projects. This mechanism reflects the fact that periods of high financial sector growth often coincide with the strong development in sectors like construction, where returns on projects are relatively easy to pledge as collateral but productivity (growth) is relatively low.  

 Next, we introduce skilled workers who can be hired either by financiers to improve their ability to lend, increasing financial sector growth, or by entrepreneurs to improve their returns (albeit at the cost of lower pledgeability). We then show that when skilled workers work in one sector it generates a negative externality on the other sector. The externality works as follows: financiers who hire skilled workers can lend more to entrepreneurs than those who do not. With more abundant and cheaper funding, entrepreneurs have an incentive to invest in projects with higher pledgeability but lower productivity, reducing their demand for skilled labour. Conversely, entrepreneurs who hire skilled workers invest in high return/low pledgeability projects. As a result, financiers have no incentive to hire skilled workers because the benefit in terms of increased ability to lend is limited since entrepreneurs’ projects feature low pledgeability. This negative externality can lead to multiple equilibria. In the equilibrium where financiers employ the skilled workers, so that the financial sector grows more rapidly, total factor productivity growth is lower than it would be had agents coordinated on the equilibrium where entrepreneurs attract the skilled labour. Looking at welfare, we are able to show that, relative to the social optimum, financial booms in which skilled labour work for the financial sector, are sub-optimal when the bargaining power of financiers is sufficiently large. 

Maybe the lesson is that finance departments should subsidize physics/chemistry/engineering departments.

One reason to worry about US inequality...it is really bad for our babies.

My colleague Alice Chen, along with Emily Oster and Heidi Williams, have a new paper that explains differences in the infant mortality rate in the United States and other OECD countries. Despite its affluence, the US ranks 51st in the world in infant mortality, which puts it at the same level as Croatia.

One reason the US performs poorly on the infant mortality measure actually reflects differences in measurement between it and other countries--babies born very prematurely in the United States are recorded as live births, but in other countries might be reported as miscarriages.  Because extremely premature babies have higher mortality rates, their inclusion in the US birth and mortality rate makes the US look relatively worse.

Nevertheless, when Chen, Oster and Williams control for reporting differences, and focus on microdata from the US, Austria and Finland, they find that the US continues to lag the others in terms of first year survival.  What is particularly interesting is that the difference between the US and other countries accelerates over the course of the first year of life--as neonatal threats recede, the position of the US worsened relative to Austria and Finland.

Here is where inequality comes in--if when Chen and co-authors look at children born to advantaged individuals (meaning married, college-educated and white) in the US, they survive at the same rates as their counterparts in Austria and Finland.  But the trio find that children of disadvantaged parents in the US have much lower survival rates than children of disadvantaged parents in the other countries.  This may well be because Europe's safety nets make the disadvantaged less disadvantaged.

(Dylan Matthews blogs on this paper also).

No comment necessary

The Violence Policy Center put out a press release this morning relating gun ownership rates to gun death rates.  I wrote to them asking for the complete data, and plotted it.  Here is the plot.

In case you're interested, the bivariate regression's R-squared is .6.

Cities and the Environment--A first order effect?

I was reading a story about peak driving over the weekend.  In the course of reading the story, I discerned that we here in California drive far less than the average American.  In fact, California ranks 41st among the states in per capita driving:

Date are from the Insurance Institute for Highway Safety.

Given the stereotype about California (as a place where everyone drives, always), this was a surprise to me.  But then it dawned on me--when one excludes the District of Columbia (which is kind of like a state, just without representation), California is the most urbanized state in the country.  And so I drew a scatter plot of VMT per capita against urbanization by state:

The negative correlation is quite apparent. To anyone who might be interested, here is the bivariate regression:

       mpc |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]
-------------+----------------------------------------------------------------
       var4 |  -81.73815    14.1223    -5.79   0.000     -110.118   -53.35832
       cons |   15994.33   1066.959    14.99   0.000      13850.2    18138.47
------------------------------------------------------------------------------

So a one percentage point increase in urbanization is associated with an 81 mile per year reduction in driving.  I think the direction of causality is not too big a problem here (it is hard to tell a story that more driving causes a reduction in urbanization).  So Matt Kahn, Ed Glaeser and Richard Florida are all right--cities are environmentally friendly!

[BTW, a little Googling led me to a paper that relates to all this].

How choosing the right discount rate matters to Max Scherzer

My student Hyojung Lee sent me to a cute article about how Max Scherzer's $210 million contract is not really a $210 million contract.  Because Scherzer is getting $15 million per year over 14 years, the present value of the contract is substantially less than $210 million; it is also worth less than a contract that pays $30 million per year over the seven years he is expected to pitch.

But Dave Cameron (the author of the piece) assigns a 7 percent discount rate to the contract.  The present value of $15 million per year over 14 years at a 7 percent discount rate is about $131 million. He chose 7 percent as the discount rate because that is the expected long run return of investing in the stock market.

A contract is not, however, like a stock.  It is a bond--contracts have seniority to equity, and guarantee a particular cash flow.  I would guess the Nats (unlike the Expos) are something like a BBB company.  The current bond yield on BBB issues is currently about 3.6 percent.  Discounting the value of the Scherzer contract at 3.6 percent produces a present value of $163 million.  Not that $131 million isn't nothing, but $163 million is a lot more.

[Update: Adam Levitin says that MLB teams are more like AAA (in bond rating, not playing quality, except, perhaps for the Diamondbacks last year), because all of baseball backs team contracts (when the Rangers went bankrupt, all players got paid).  That would drive the discount rate to 2.8 percent, and raise the value of the contract to $172 million.]