Summer School 2017 in Paris

If you look at these photos,  you might be able to find me in one of them (hint — look at the dinner photo).  I enjoyed speaking on June 15th 2017.  As I should have guessed, the room was not air conditioned and my students were not that cheery in the heat.  Still, they were a very smart group who posed some interesting questions.  As I discussed the urban economics of climate change adaptation (see here, here, and here);  the PHD students kept talking about co-ordination failures and adjustment costs.

1. co-ordination failures — we know that Manhattan is a successful co-agglomeration of firms and industries.  Suppose that due to Sea Level Rise that a large % of the land area of Manhattan will be lost. Will aggregate productivity decline because individual firms will not co-agglomerate together again on “higher ground”?   The students want to argue that the answer is “yes”. I don’t believe this.   Firms face a site selection decision. If they can’t co-ordinate their location choices, they can sit down and read Ellison, Glaeser and Kerr’s AER paper on co-agglomeration and figure out where to locate. If there are $20 on the ground due to co-agglomeration spillover effects, then a new consulting industry will arise to help firms choose where to go (as long as they gain some of the benefits of these spillovers then they will internalize these gains when they choose where to locate).

2.  Adjustment Costs — My European students appear to believe that nobody is “at the margin” that nobody adjusts their behavior and moves when they face new risks.  I argued that even if some of us inelastically supply ourselves to a point in space that everyone eventually gets old.  So, at most this is a one generation problem because in an OLG model today’s old will not be alive next period and today’s middle aged will be old.  So, in an intergenerational economy —- those who are the children of tomorrow’s old will bear extra costs if their loved ones live in increasingly risky areas.  They have the right incentives to protect their parents from such anticipated trends. To repeat my point, if your mom is stuck in place (perhaps because she loves her network and place) and if climate science highlights that the place will face new record heat or sea level rise, you have the right incentives to seek solutions (stilts, air conditioning) that helps to protect your mother from these place based risks. Your daughter (the young generation) will not lock in and make the same place based bet as your mother. She will have the right incentives to seek out a safer location.

While I made these points to the students, I also said that both of these are valuable future research topics. As I listened to the students, I kept being concerned that they were giving “political answers” rather than PHD economics answers.  The separation theorems must hold. We must be able to use our economic logic independent of our political ideologies concerning how we wish the world works.  As usual, even this very smart group appeared to be unwilling to separate the normative issue of “how can we reduce GHG emissions” from the positive economic issue of how does  a macroeconomy (that consists of self interested households and firms) adapt to an emerging threat.  The group appeared to fear the logical implications of neo-classical economics.  That interests me.