Estimating Equilibrium Models of Sorting across Locations

With the growing recognition of the role played by geography in all sorts of economic problems, there is strong interest in measuring the size and scope of local spillovers (i.e., simple anonymous agglomeration or congestion effects, or more complicated interactions between individuals or firms of specific types). It is well-understood, however, that such spillovers cannot be distinguished from unobservable local attributes using just the observed location decisions of individuals or firms. We propose an empirical strategy for recovering estimates of spillovers in the presence of unobserved local attributes for a broadly applicable class of equilibrium sorting models. This approach relies on an instrumental variables strategy derived from the internal logic of the sorting model itself. We show practically how the strategy is implemented, provide intuition for our instrumental variables, and discuss the role of effective choice-set variation in identifying the model, and carry-out a series of Monte Carlo experiments to demonstrate the instruments' performance in small samples.Local Spillovers, Location Choice, Economic Geography, Natural Advantage, Social Interactions, Network Effects, Endogenous Sorting, Discrete Choice Models, Agglomeration, Congestion

Social Exclusion and the Two-Tiered Healthcare System of Brazil

In Brazil, there exists a two-tiered system of healthcare access. Those with sufficient means have access to a private system of healthcare that provides quality treatment on demand, while the remainder of the country relies on an overburdened system of public clinics and hospitals. Household survey data are used to determine which socio-demographic groups rely most on this public healthcare system. Current demographic trends suggest that the public healthcare infrastructure will become more and more heavily used in the coming decades. A stylized model of healthcare choice is estimated, and its parameters are used to conduct counterfactual simulations of the welfare implications of this increased congestion, and of policies to offset it, like private healthcare subsidies.

A Revealed Preference Approach to the Measurement of Congestion in Travel Cost Models

Travel cost models are regularly used to determine the value of recreational sites or particular site characteristics, yet a key site attribute, congestion, is often excluded from such analyses. One of several reasons is that congestion (unlike many other site attributes) is determined in equilibrium by the process of individuals sorting across sites, and thus presents significant endogeneity problems. This paper illustrates this source of endogeneity, describes how previous research has dealt with it by way of stated preference techniques, and describes an instrumental variables approach to address it in a revealed preference context. We demonstrate that failing to address the endogeneity of congestion will likely lead to the understatement of its costs, and possibly to the mistaken recovery of agglomeration benefits. We apply our technique to the valuation of a large recreational fishing site in Wisconsin (Lake Winnebago) which, if eliminated, would induce significant re-sorting of anglers amongst remaining sites. In our application, ignoring congestion leads to an understatement of the lake’s value by more than 50 percent.Congestion, Random Utility Model, Site Valuation, Travel Cost, Discrete Choice, Instrumental Variables, Quantile Regression

A Note on the Equilibrium Properties of Locational Sorting Models

A central feature of many models of location choice -- whether of firms or households, within or across cities -- is the role of local interactions or spillovers, whereby the payoffs from choosing a location depend in part on the number or attributes of other individuals or firms that choose the same or nearby locations in equilibrium. The main goal of this paper is to develop the equilibrium properties of a broadly applicable and readily estimable class of sorting models that allow the location decision to depend on both fixed local attributes (including unobserved attributes) and such local interactions. In particular, we prove uniqueness in the case of congestion effects and use a series of simulations to demonstrate that a unique equilibrium is more likely to obtain (i) the smaller are any agglomeration effects, (ii) the larger are the set of choices available to the agents, (iii) the more "meaningful variation" there is in those choices, and (iv) the more heterogeneous are the agents themselves. This is encouraging for the use of our model to describe the sorting of individuals and firms over geographic space, where the number of choices is usually large and variation in exogenous fixed attributes can be important. Moreover, these results conveniently coincide with the conditions required for econometric identification of our model.Local Spillovers, Social Interactions, Economic Geography, Natural Advantage, Endogenous Sorting, Discrete Choice Models, Agglomeration, Congestion, Random Utility

Hedonic Prices and Implicit Markets: Estimating Marginal Willingness to Pay for Differentiated Products Without Instrumental Variables

The hedonic model of Rosen (1974) has become a workhorse for valuing the characteristics of differentiated products despite a number of well-documented econometric problems. For example, Bartik (1987) and Epple (1987) each describe a source of endogeneity in the second stage of Rosen's procedure that has proven difficult to overcome. In this paper, we propose a new approach for recovering the marginal willingness-to-pay function that altogether avoids these endogeneity problems. Applying this estimator to data on large changes in violent crime rates, we find that marginal willingness-to-pay increases by ten cents with each additional violent crime per 100,000 residents.

Estimating the Amenity Costs of Global Warming in Brazil: Getting the Most from Available Data

This paper develops a theoretically consistent technique for valuing non-marketed local attributes using compensating income differentials in the absence of housing market data. The individual's indirect utility function is identified with aggregate data describing equilibrium location decisions, and this function is used in place of the unidentified equation describing how housing prices are determined. The model is used to value climate amenities in Brazil, where such data problems are prevalent. Similar problems arise in other developing countries, particularly when one looks outside of the largest cities

Migration and Hedonic Valuation: The Case of Air Quality

Conventional hedonic techniques for estimating the value of local amenities rely on the assumption that households move freely among locations. We show that when moving is costly, the variation in housing prices and wages across locations may no longer reflect the value of differences in local amenities. We develop an alternative discrete-choice approach that models the household location decision directly, and we apply it to the case of air quality in U.S. metro areas in 1990 and 2000. Because air pollution is likely to be correlated with unobservable local characteristics such as economic activity, we instrument for air quality using the contribution of distant sources to local pollution %u2013 excluding emissions from local sources, which are most likely to be correlated with local conditions. Our model yields an estimated elasticity of willingness to pay with respect to air quality of 0.34 to 0.42. These estimates imply that the median household would pay $149 to$185 (in constant 1982-1984 dollars) for a one-unit reduction in average ambient concentrations of particulate matter. These estimates are three times greater than the marginal willingness to pay estimated by a conventional hedonic model using the same data. Our results are robust to a range of covariates, instrumenting strategies, and functional form assumptions. The findings also confirm the importance of instrumenting for local air pollution.

Estimating the Amenity Costs of Global Warming in Brazil: Getting the Most from Available Data

This paper develops a theoretically consistent technique for valuing non-marketed local attributes using compensating income differentials in the absence of housing market data. The individual's indirect utility function is identified with aggregate data describing equilibrium location decisions, and this function is used in place of the unidentified equation describing how housing prices are determined. The model is used to value climate amenities in Brazil, where such data problems are prevalent. Similar problems arise in other developing countries, particularly when one looks outside of the largest cities.wage-hedonics, discrete-choice analysis, climate amenity, global warming

Regional subsidies and industrial prospects of lagging regions

Large and sustained differences in economic performance across regions of developing countries have long provided motivation for fiscal incentives designed to encourage firm entry in lagging areas. But empirical evidence in support of these policies has been weak at best. The authors undertake a direct evaluation of the most prominent fiscal incentive policy in Brazil, the Fundos Constitucionais de Financiamento (Constitutional Funds). In doing so, they exploit valuable features of the Brazilian Ministry of Labor's RAIS data set to address two important elements of firm location decisions that have the potential to bias an assessment of the funds: (1) firm"family structure"(in particular, proximity to headquarters for vertically integrated firms), and (2) unobserved spatial heterogeneity (with the potential to confound the effects of the funds). The authors find that the pull of firm headquarters is very strong relative to the constitutional funds for verticallyintegrated firms, but that, with nonparametric controls for time invariant spatial heterogeneity, the funds provide significant incentives for firms in many of the targeted industries.Economic Theory&Research,Scientific Research&Science Parks,Science Education,Technology Industry,Private Participation in Infrastructure

Health, Climate and Development in Brazil: A Cross-Section Analysis

This study uses a cross-section of Brazilian municipal data in an attempt to estimate the impact of climate changes on the pattern of disease morbidity and infant mortality. Brazil is a country with climate conditions that range from tropical rain forest to temperate savanna regions in the southern part of the country. When one travels from north to south and west to east, and from sea level to altitudes of 1,300 meters, it is possible to examine the results of a stochastic process and a range of global warming experiences. Therefore looking at the relationship between health and climate in Brazil could help to explain the impact of climate change on the health of the population. The objective of this study is to understand the relationship between health and climate after taking into account the interaction between man and nature represented by the level of economic development and the effects of policies to create a more (or less) adequate life environment.