Transcript Introduction to Land Rent

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• In Hahn 204 from 5:30 pm to 7:00 pm
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Ades and Glaeser (1995)
• Main Question of the Paper:
– Explain the effects of Politics on Urban
Concentration
• Identification Strategy
– Differentiate the effects of political forces on urban
concentration from other theories (“Trade and
Commerce” and “Industry”)
– Causality issues: Do dictatorships lead to spatially
concentrated areas, or spatially concentrated areas
are more likely to have dictatorships?
How do Policy Affects Urban Concentration
• People living in the capital city have more influence
on the government than people living in the county
– Distance from city lessens influence on
government
•Distance lowers violence threat •Political actions less notorious
•Distance reduces information
•Less communication
– Governments transfer resources to the capital, and
these attract migrants to the main city
Political power of capital residents is most important:
•No political rights to
residents hinterland
•Large rents to
dispense
•Respond easily to
local preassure
Results Table IV
Results Table VI
• Transport expending, trade
and dictatorship variables are
endogenous:
cov(x,  )  0
• Possible instruments:
–
–
–
–
Regional Political X’s
Predetermined Political X’s
Regional Infrastructure
Main Assumption:
cov(z ,  )  0
Discussion
• Why is the paper important?
– Is it important to understand size of cities?
– What are the tradeoffs between costs from a big cities and
economies in a big city?
– Is this different in developing countries or developed
countries?
• Do you believe their results?
– Evidence from today, what is the variation driving the results
in their empirics?
– Cities in the 21st century?
World's 17 Biggest Cities by 2000
Population City
Population
Country
% Population in
City
% City Rank
Tokyo
26.40
126.87
0.21
2
Mexico City
18.10
97.97
0.18
3
Sao Paulo
18.00
170.10
0.11
5
New York
16.70
282.22
0.06
10
Mumbai
16.10
1,015.92
0.02
13
Los Angeles
13.20
282.22
0.05
12
Calcutta
13.10
1,015.92
0.01
14
Shanghai
12.90
1,262.65
0.01
16
Dhaka
12.50
131.05
0.10
6
Delhi
12.40
1,015.92
0.01
15
Buenos Aires
12.00
36.78
0.33
1
Jakarta
11.00
206.27
0.05
11
Osaka
11.00
126.87
0.09
7
Beijing
10.80
1,262.65
0.01
17
Rio de Janeiro
10.70
170.10
0.06
9
Karachi
10.00
138.08
0.07
8
Metro Manila
10.00
76.63
0.13
4
Note: Population of city is based on the United Nations World's Urbanization Prospect, country population source is the World Bank's
Development indicators.
Introduction to Land Rent
Chapter 7
Goal of the Chapter
• This chapter answers 3 main questions:
1) What determines the price of land?
2) Who benefits from the public policies
that increase fertility or accessibility
to land?
3) Does the land market allocate land
efficiently?
Two Definitions
• Land Rent: The price paid in a period of time for
the right to use the land.
• Market Value: Present value of the stream of rental
income generated by land.
R
R
PV  
 PV 
t
i
(1  i )
if
t 
• The Market Values of a piece of land is the
maximum amount that an investor is willing to pay
for the land, giving that the best alternative
investment yields a return of i percent per year.
Land Rent and Fertility
(Ricardian Model of Land Rent, 1821)
Assumptions:
1) Fixed inputs and output prices set by the
market
2) No economic profits
3) 3 types of land: high, medium and low
productivity
4) Land is rented to the highest bidder
5) Zero transportation costs
Fertility and Land Rent
$
S
MC
MC
MC
ATC
ATC
ATC
D
Corn Market
Q
High Fertility
Q
Q
Medium Fertility
Low Fertility
Q
Analysis
• Analysis: The high fertility land yields the highest prerent profits, followed by the medium fertility land and
then the low fertility land. That is because it has lower
non-land costs (fertilizer, seeds, tractors, etc.). Since
there are no barriers to entry, farmers will be willing to
pay rent that equals all economic profits.
• Definition: Left Over Principle. In equilibrium land
rent equals the excess of revenue over non-land costs.
A Policy Example
• Assume a policy that decreases costs, like an
aqueduct or irrigation project. The cost curves
for all three types of land will go down.
$
S
S’
MC
MC
MC
ATC
ATC
ATC
D
Corn Market
Q
High Fertility
Q
Q
Medium Fertility
Low Fertility
Q
Analysis: Policy Subsidy
• Analysis: Step 1: Pre-rent profits increase, competition
among farmers will bid up the price of land, up to the point
where economic profits are zero. The savings in the
production costs go to the landowner in the form of higher
rent.
• Analysis: Step 2: Since the marginal costs curves are shifting
downward, the supply from the high and medium fertility
land will increase. Furthermore, the low fertility land, that
used to be shut down, now produces corn. This shifts the
supply curve even more to the right and lowering prices, so
consumers will also benefit.
• Who wins and who looses from the subsidy? The smaller
the geographical area covered by the irrigation program, the
larger the benefits that go to landowners.
Interactions between Land and Product Markets
Corn Market
S
$
d1
$
Land Market
S
d2
Q
D2
D1
T
• Corn Laws in England:
Since the supply of land is
inelastic, a policy eliminating
corn imports, will increase the
demand for domestic corn.
This in turn increases the
marginal product of land,
increasing the demand for land
and thus the price of land.
Land Taxation
• Property taxes: Land and investments in the land
are taxed on the same rate
• 100% Tax on Rental Income: (Henry George,
1880)
– Taxes all land, not investments
• Partial Land Tax
• Two-Rate or Split Tax
– Australia, New Zealand, Pittsburgh
An application: 9/11 and New York City
Haughwout and Rabin (2005): Exogenous Shocks
and the Dynamics of City Growth: Evidence
from New York City
– Find the spatial responses of New York City on
9/11:
• Human Capital
• Residential Location
• Office Location
Employment in New York City
Real Estate in New York City
• Residents who signed 2 year commitment on Manhattan were
eligible for a 12K grant
Rentals in Lower Manhattan
• Are more expensive
rentals after 9/11 in
lower Manhattan a
function of:
– Better Amenities
– Subsidy on Demand
(leftover Principle)
– Negative Shock on
Supply
Office Markets
Conclusion
• It is hard to conclude that 9/11 had an effect on
human capital or physical capital on Manhattan.
• Most changes predated 9/11
• The one effect is on Manhattan rentals, where
the price increased by approximately 8,000
dollars for a two-year rent