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• In Hahn 204 from 5:30 pm to 7:00 pm

• Assignment is due on Thursday by 5 pm in my mailbox.

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:

• Possible instruments:– Regional Political X’s– Predetermined Political

X’s– Regional Infrastructure– Main Assumption:

0),cov( x

0),cov( z

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

CityPopulation

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.

if

• 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.

iR

PVi

RPV t)1(

t

Land Rent and Fertility (Ricardian Model of Land Rent, 1821)

Assumptions: 1) Fixed inputs and output prices set by the market2) No economic profits3) 3 types of land: high, medium and low productivity4) Land is rented to the highest bidder5) Zero transportation costs

Fertility and Land Rent

$

Corn Market High Fertility Medium Fertility

Low FertilityQ Q Q Q

S

D

MCMC MC

ATC

ATC ATC

Analysis

• Analysis: The high fertility land yields the highest pre-rent 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.

$

Corn Market High Fertility Medium Fertility

Low FertilityQ Q Q Q

S

D

MCMC MC

ATC

ATC ATCS’

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 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.

$

$

T

Q

S

d1d2

S

Corn Market

Land Market

D2

D1

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