How Does Applied Microeconomic Research Accelerate Climate Change Adaptation?

% of readers think this story is Fact. Add your two cents.

With that preamble, let’s begin.   We face a serious climate change adaptation challenge.  How does economics research inform our path forward?  I encounter such pessimism among the young about their future.   They are wrong to doubt the ability of our society to continue to flourish in the face of climate change.  Capitalism offers tremendous potential for coping with emerging risks.  This is the main theme of my new 2021 Yale University Press book.  Competition to remain resilient protects all of us.

In this blog post, I will not discuss IAM models and those scholars who are bold enough to use these models to predict the world in 2100. I’m not touching that.  The year 2100 is 79 years ago.  Go back 79 years to 1942.  How much of our modern life’s economy would FDR and Churchill have anticipated?    Would Churchill be surprised by the rise of China and India?  You see my point.

Let’s return to the “small ball” of modern applied micro that many of NBER’s EEE researchers (including myself) do.

A challenge that climate adaptation economists face is that we can’t run randomized field experiments. We must study how the population copes with the shocks that Mother Nature confronts us with. These cause and effect papers represent “natural experiments”.

Many economists use this experimental design to measure correlations between past events and economic damage.

Back in 2005, I wrote my first paper in this tradition and then I just kept going.

1. Matthew E. Kahn, 2005. “The Death Toll from Natural Disasters: The Role of Income, Geography, and Institutions,” The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 271-284, May.

1. Leah Platt Boustan & Matthew E. Kahn & Paul W. Rhode, 2012. “Moving to Higher Ground: Migration Response to Natural Disasters in the Early Twentieth Century,” American Economic Review, American Economic Association, vol. 102(3), pages 238-244, May.

1. Kahn Matthew E., 2015. “Climate Change Adaptation Will Offer a Sharp Test of the Claims of Behavioral Economics,” The Economists’ Voice, De Gruyter, vol. 12(1), pages 25-30, August.
2. Matthew E. Kahn, 2015. “A Review of The Age of Sustainable Development by Jeffrey Sachs,” Journal of Economic Literature, American Economic Association, vol. 53(3), pages 654-666, September.
3. Matthew E. Kahn, 2016. “The Climate Change Adaptation Literature,” Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 10(1), pages 166-178
4. Bunten, Devin & Kahn, Matthew E., 2017. “Optimal real estate capital durability and localized climate change disaster risk,” Journal of Housing Economics, Elsevier, vol. 36(C), pages 1-7.
5. Matthew E. Kahn, 2017. “Will Climate Change Cause Enormous Social Costs for Poor Asian Cities?,” Asian Development Review, MIT Press, vol. 34(2), pages 229-248, September.

1. Rhiannon Jerch & Matthew E. Kahn & Gary C. Lin, 2020. “Local Public Finance Dynamics and Hurricane Shocks,” NBER Working Papers 28050, National Bureau of Economic Research, Inc.
2. Amine Ouazad & Matthew E. Kahn, 2019. “Mortgage Finance and Climate Change: Securitization Dynamics in the Aftermath of Natural Disasters,” NBER Working Papers 26322, National Bureau of Economic Research, Inc.

1. Kilian Heilmann & Matthew E. Kahn, 2019. “The Urban Crime and Heat Gradient in High and Low Poverty Areas,” NBER Working Papers 25961, National Bureau of Economic Research, Inc.

Such reduced form papers provide insights about how future climate shocks will affect our economy and our quality of life if we fail to adapt.    In this sense, reduced form empirical work plays the  role of Paul Revere by giving us a “heads up” about impacts that we are experiencing under “business as usual”.  Such new news provides an incentive to seek adaptation strategies and the private sector is great at delivering what we want (when aggregate demand is high enough).  My 2020 LSE Lecture explores this theme.

An underexplored theme in modern environmental economics is the “rules of the game”.  Applied researchers estimate conditional correlations.  Given the past “rules of the game”, what is the past association between natural disasters and economic damage.  Such estimates are useful but they are not “laws of physics”.  Such estimates can shrink to zero if we enact different “rules of the game”.   Applied researchers don’t think enough about the strategic environment where their agents “reside”.  As applied researchers zero in and focus on statistical issues, certain nuanced economics ideas are ignored.  Economists are a special set of statisticians.  We understand that our data points represent purposeful decision makers who play their best strategies within the rules of the game that they face. Such agents would make different choices if they are confronted with different rules.

The key question here is what are “rules of the game” that accelerate climate change adaptation?  How do we harness the greatness of the private sector to devote more effort to building up our nation’s resilience?   In this March 2021 letter to the Federal Housing Finance Agency, I explore this theme.