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Robin Burgess

London School of Economics and Political Science
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Title: “Do Agents Internalize the Environmental Costs They Impose on Others? Evidence from 100,000 Forest Fires in Indonesia” (Joint with Clare Balboni, LSE and Ben Olken, MIT)

Abstract: Negative environmental externalities in the form of pollution, degradation of natural resources and greenhouse gas emissions are highly prevalent in developing countries and impose large costs on resident populations. Private benefits are often small relative to social costs and these externality producing actions are often illegal or highly regulated. A central question in environmental economics therefore concerns the degree to which agents internalize the costs that they impose on others. To study this we construct a novel data set of over 100,000 forest fires in Indonesia, in which we link burning areas over time and space to determine where each fire started and where it spread. These forest fires run out of control, and in 2015 CO2 emissions from fires in Indonesia exceeded those from all sources in the US. Consistent with fire setting carrying private benefits we find that fires are more likely to be set in areas following deforestation where land is being converted to plantations. By mapping land types around ignition points, and using temporal variation in wind speeds (which influence the risk that fires spread), we show that agents partially respond to costs. They are less likely to set fires and more likely to contain fire spread when the cost of fire spread is higher. On net we estimate that fires would be halved if the area at risk for fire spread was entirely within the same property owner as the ignition point. To study how public and private regulation might be play a role in bringing private and social costs into greater alignment we examine both how the incidence of government sanctions for starting fires corresponds with fire setting behavior and how membership of the Roundtable on Sustainable Palm Oil (RSPO) affects the propensity to set forest fires.

Tomomichi Amano

Columbia University
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Title: “Ratcheting, Competition, and the Diffusion of Technological Change: The Case of Televisions under an Energy Efficiency Program”

Abstract: The study of the diffusion of innovation and technological change enjoys a long tradition in marketing and often places an emphasis on the role of consumer adoption. Complementing this process of diffusion are firms, which differentiate in the extent to which they provision technological change in their products. In markets with societal implications or externalities, policy is implemented to avoid the under provision of innovation. Firms have clear incentives to engage in strategic behavior in such markets because policymakers use market outcomes as a benchmark in designing regulation. This study examines a unique energy efficiency standard for television sets, under which future minimum efficiency standards are explicitly a function of current product offerings. The setting illustrates firms’ dual incentives at work: Depending on the competitive environment, they have strategic incentives to both ratchet up, and ratchet down, the quality of their product offerings in order to influence future standards. These incentives affect the pace at which innovation reaches consumers. I develop and estimate a structural model of product entry and endogenous regulation to illustrate how such dynamic standards affect product release decisions, consumer purchases, and the competitive environment. My analysis provides evidence that firms are more likely to ratchet down quality when they have similar cost structures or when the market is concentrated.

Judson Boomhower

University of California, San Diego
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Title: “Moral Hazard, Forest Fires, and Adaptation to Climate Change”

Abstract: Many important adaptive responses to climate change will occur through government investments, as opposed to private market transactions.  Government programs and investments in infrastructure, public health, national security, scientific research, and emergency response can lessen the costs of climate change.  At the same time, these large public investments raise basic public economics questions about moral hazard, distributional impacts, and allocative efficiency.  We examine these questions in the context of wildland fires in the western United States.  The frequency and severity of wildfires are increasing due to climate change. The federal and state governments now spend billions of dollars each year on wildland firefighting.  This paper considers these expenditures as an in-kind benefit to homeowners in high fire-risk areas.  Using historical firefighting data and parcel-level data on the universe of single family homes in the western U.S., we estimate the causal impact of nearby private homes on federal firefighting expenditures.  We then use those estimates to calculate the implicit transfer to homeowners due to fire protection spending that is devoted to protecting homes.  Finally, we apply simple spatial equilibrium reasoning to quantify potential distortions in new residential construction due to moral hazard, and to explore a policy counterfactual where developers pay a fee equal to the expected net present value of fire protection costs at the time of initial home construction.  We find that residential development dramatically increases fire suppression costs, and that federal firefighting efforts represent a large transfer of federal revenues to a few landowners in high-risk, low-density places.  For our highest-cost categories of homes, the net present value of fire suppression costs exceeds 5–10% of total property value.

Mar Reguant

Northwestern University
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Title: “Measuring Leakage Risk” (joint with Meredith Fowlie)

Abstract: When a policy regulating greenhouse gas emissions applies to only a subset of emitting sources, a policy-induced shift in economic activity to unregulated sources can substantially undermine policy effectiveness via emissions “leakage”. Output-based rebating of compliance costs has emerged as a preferred approach to mitigating this leakage risk. Output-based rebates, which act as a production subsidy, have potentially significant implications for both economic efficiency and the distribution of policy impacts. It is therefore important to judiciously target these subsidies to those industries truly at leakage risk. We provide a theoretically sound basis for deriving industry-specific, output-based subsidies under different policy objective functions. We show how the optimal industry-specific subsidies depend on both emissions intensity and the responsiveness of trade flows to policy-induced changes in domestic production. Using rich transaction and firm-level data from the U.S. Census, we calibrate industry-specific, output-based subsidies for manufacturing sectors in the United States. We assess the efficiency and distributional implications of implementing a domestic carbon policy with and without these leakage mitigation provisions.

Laura Bakkensen

The University of Arizona
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Title: “Estimating Heterogeneous Preferences to Avoid Flood Risk and the Implications for Disaster Exposure” (Joint with Lala Ma)

Abstract: Flooding remains one of the costliest natural disasters in the United States. Key policy questions arise regarding potential heterogeneity in Marginal Willingness to Pay (MWTP) to avoid flood risk. Using house sales across Florida in 2010, we build a discrete choice, residential sorting model to estimate heterogeneous household preferences to avoid flood risk. We employ a boundary discontinuity design (BDD) to control for potentially confounding, yet unobserved, flood risk correlates. In addition, we account for pricing of National Flood Insurance Program (NFIP) premiums by incorporating household-level flood risk and subsidies, which, if ignored, may bias MWTP estimates. We find evidence of heterogeneous sorting based on home buyer race and income. We then utilize our model to estimate policy counterfactuals. Understanding heterogeneity in preferences for such risks is key to assessing the extent to which vulnerable sub-populations systematically sort into higher risk areas. In addition to providing new valuation estimates for flood risk, our results have implications for the distributional impacts of US natural disaster policies and its potential role in exacerbating inequitable flood risk exposure in the US.

Jing Li

Massachusetts Institute of Technology
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“Compatibility and Investment in the U.S. Electric Vehicle Market”

Abstract: Competing standards often proliferate in the early years of product markets, potentially leading to socially inefficient investment. This paper studies the effect of compatibility in the U.S. electric vehicle market, which has grown tenfold in its first five years but has three incompatible standards for charging stations. I develop and estimate a structural model of consumer vehicle choice and car manufacturer investment that demonstrates the ambiguous impact of mandating compatibility standards on market outcomes and welfare. Compatibility may benefit consumers by providing access to all existing charging stations. However, firms may cut back on their investments because the benefits from one firm’s investments spill over to rivals. Firm response in investment may erode consumer gains from compatibility. I estimate my model using U.S. data from 2011 to 2015 on vehicle registrations and charging station investment and identify demand elasticities with variation in federal and state subsidy policies. Counterfactual simulations show that mandating compatibility in charging standards would decrease duplicative investment in charging stations by car manufacturers and increase the size of the electric vehicle market.

Catherine Wolfram

University of California, Berkeley
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“Is Rural Electrification Worth It? Experimental Evidence from Kenya” (Joint with Ken Lee and Ted Miguel)

Abstract: Over a billion people live without electricity in their homes, and many development initiatives are prioritizing rural electrification programs. Much of the existing evidence on the impacts of rural electrification comes from non-experimental studies. The estimated impacts vary dramatically, which could reflect heterogeneous treatment effects, invalid identification strategies, or a combination of the two. We present results from a field experiment in which we offered randomly selected households one of three levels of subsidies to connect to the electricity grid, including a 100 percent subsidy for a third of treated households. After approximately 18 months with an electricity connection, estimated treatment effects across most pre-specified major measures (including household consumption, assets, health, and children’s test scores) are almost all small and insignificantly different from zero. Complementary evidence on appliance acquisitions and electricity usage suggest that treated households did not use much electricity. We also show that nearby households appear similarly unaffected by their neighbors’ connections. On the other hand, we find some evidence consistent with heterogeneous treatment effects. Specifically, households who were offered partial subsidies seemed to experience greater gains from an electricity connection. For example, female labor force participation increased by almost 10 percent at the partial subsidy households.

Solomon Hsiang

University of California, Berkeley
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“The Marginal Product of Climate” (Joint with Tatyana Deryugina)

Abstract: We develop an empirical approach to value marginal changes to a climate in terms of total market output given optimal factor allocations in general equilibrium. Our approach fully accounts for unobservable heterogeneity as well as all costs and benefits of adaptation in climates of arbitrary dimension. Importantly, we use the Envelope Theorem to show that the marginal product of a probabilistic long-run climate can be exactly identified using only idiosyncratic weather realizations. We apply this approach to the temperature climate of the modern United States and find that, despite evidence that populations have adapted to their local climates, the marginal product of climate has remained unchanged during 1970-2010, with the highest temperatures having the lowest net value. Capital investments associated with urbanization are important but incomplete substitutes for mild temperatures. Integration of marginal products allows us to construct a value function for climate up to a constant, allowing valid causal, non-marginal, cross-sectional and climate change comparisons net of all re-optimization using existing adaptation technologies. In our preferred specification, we estimate that, for example, the climate of Northern Minnesota returns over $2,000 per capita more annually than the climate of Southern Texas. Using a 3% discount rate, the NPV of “business as usual” warming (RCP8.5) until 2100 in the median scenario is a loss of $6.7 trillion. Full Paper

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