Office Hours Tomorrow:

1. Office Hours Tomorrow: • In Hahn 204 from 5:30 pm to 7:00 pm • Assignment is due on Thursday by 5 pm in my mailbox.

2. 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?

3. 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 • Governments transfer resources to the capital, and these attract migrants to the main city

4. Results Table IV

5. 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:

6. 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?

8. Introduction to Land Rent Chapter 7

9. 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?

10. 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.

11. 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

12. Fertility and Land Rent MC MC $ S MC ATC ATC ATC D Q Q Q Q Corn Market High Fertility Medium Fertility Low Fertility

13. 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.

14. 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. MC MC $ S MC S’ ATC ATC ATC D Q Q Q Q Corn Market High Fertility Medium Fertility Low Fertility

15. 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.

16. 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. Interactions between Land and Product Markets Corn Market S $ d2 d1 Land Market Q S $ D2 D1 T

17. 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

18. 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

19. Employment in New York City

20. Real Estate in New York City • Residents who signed 2 year commitment on Manhattan were eligible for a 12K grant

21. 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

22. Office Markets

23. 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