post-katrina new orleans: inequality and schooling s. barbieri – j. edwards tulane university new...
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Post-Katrina New Orleans: Inequality and Schooling
S. Barbieri – J. Edwards
Tulane University
New Orleans Political Economy Workshop
Tulane University – September 2010
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Introduction
• We study the characteristic of post-Katrina New Orleans
• Assumption: “New” New Orleanians will be mostly “Old” New Orleanians
• Focus: two salient characteristics of “Old” New Orleans– Income Inequality – Dual school systems
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Introduction
• Inequality– Substantial fraction of the population is “marginal”– Marked differences between very poor “unskilled”,
and very rich “skilled”– Gini coefficient at the level of Nairobi, Buenos Aires,
Santiago (above 0.5)
• School systems– Extremely poor performing public schools– Extensive private school system– Class and race segregation
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Introduction
• First, we build a “descriptive” model• Components
1. Standard “General Equilibrium”
2. School choice
3. Location decision
4. Political determination of public services (education) and taxation
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Introduction
• Apply Katrina – We collapse its effects into “better” outside opportunity.
• Questions – Predictions – Interpretation1. Who returns? Are they better-off?
2. Composition of population?
3. After-storm income distribution?
4. New level of public services (education)?
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Introduction• Results
1. Among skilled agents, only relatively rich/productive agents return. Nonetheless, they are worse-off.
2. The composition of population tilts towards a more skill-intensive city.
3. The after-storm income distribution is likely to be more equal.
- Composition effect
- Price effect: better compensation for returning unskilled workers
1. Public services (education) improve.
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Introduction
• Main reason: behavior of unskilled agents– Market forces are already compressing them as much
as possible. It turns out this makes them crucial– They cannot absorb the adverse consequences of
Katrina
1. They return in smaller numbers than skilled agents
2. Those that return receive a better pay
3. It becomes in the interest of skilled agents to provide better education, to reduce this extra-pay
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Model Description
• Agents and preferences• Common log-utility• 2 types of agents: Ns skilled, Nu unskilled• 2 goods
– Good 1 - Skilled agent j endowment: e(j) – New Orleans specific.
• e is decreasing, and e(0) is “very large”– Good 2 - Any unskilled agent’s endowm. = 1
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Skilled Agents’ Endowment Distribution
Population of skilled agents
Endowment
1
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Model Description
• School Choice• The consumption of schooling enters the utility
function as any other good• Agents have two possible choices
1. Public school: fixed level gm for free. No possibility to supplement.
2. Private provision: any level, at the cost of one unit of good 1 for any unit of g.
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Model Description
• Location Decision• Skilled agents earn a reservation utility of log Rs
if they leave the city• Unskilled agents earn a reservation utility equal
to log Ru if they leave the city
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Model Description
• Policy• Education financed with budget-balancing
proportional tax t on skilled agents’ endowment• Public education level gm is chosen through the
political process, taking into account all possible repercussions on prices, population, etc.
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Equilibrium Definition
1. Standard competitive framework• agents maximize utility, given P, the price of good 2
(unskilled) in terms of good 1• Markets clear, given populations Ns and Nu
2. Location• given P and gm, no agent moves in or out of the city
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Equilibrium Definition
3. Policy• Given education choices, taxes balance the budget• Fully anticipating all migration and general
equilibrium effects, gm is a Condorcet winner
Consequence: only skilled agents matter in the determination of gm, unskilled agents are always indifferent, so they do not vote.
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Equilibrium Characterization
• A unique equilibrium where all skilled (unskilled) agents opt for private (public) school exists if the outside utility of skilled agents is sufficiently large with respect to the one of unskilled agents.
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Characterization (formal)
• Tot. endowm. goods 1 and 2: E1 and E2
• Then
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Characterization (informal)
• Economic variables• The price of the good provided by the unskilled
agents, P, is1. Increasing in the ratio of total skilled
endowment/total unskilled endowment
2. Decreasing in the level of public education provided
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Characterization (informal)
Population variables•Both the skilled and unskilled populations are decreasing in the outside opportunities•All unskilled agents are indifferent between living in the city and outside it. All (but one) skilled agents strictly prefer living in New Orleans•The unskilled population increases in the level of public education provided
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Characterization (informal)
• Private school choice1. Only “rich” agents privately provide schooling.
Private vs. Public: public school is free, but fixed at some level.
2. Lowest private consumption of education is strictly larger than the publicly provided gm
It makes sense to pay for education only if you do a much better job than the free option
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Characterization (informal)
• Public School financing– The level gm is calculated as the unique value that
maximizes any skilled agent utility (logs help here)– It maximizes the skilled population– It serves to increase the population of unskilled
agents and thus lower the price P of the unskilled good
– It does not maximize the overall population
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Katrina• Model its effect as an increase in reservation
utilities– Simply the cost of moving back to the city– Housing repairs– Higher insurance rates– Any information cost about the possibilities outside the
city of New Orleans has been already incurred, albeit involuntarily
• “Classless shock:” percentage changes in reservation utilities are the same for skilled and unskilled agents
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Post-Katrina Equilibrium
Unskilled agents play a crucial role. Market forces are already compressing their utility to the reservation level. To induce them to return they must be compensated for the cost of moving back.
Economic variables: – The price of the good provided by unskilled agents, P,
must rise.
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Post-Katrina Equilibrium
Population variables. Smaller overall population– Both numbers of skilled and unskilled agents
decrease, since reservation utilities are higher– The poorer skilled agents leave (possibility of middle-
class disappearance)– Under standard regularity conditions, the ratio of
skilled to unskilled agents increases (consistent with the increase in P)
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Post-Katrina Equilibrium
Income inequality. Under standard regularity conditions, inequality decreases
1. The “New” New Orleans is relatively more skilled-intensive (composition effect)
2. The income of unskilled agents rises
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Post-Katrina Equilibrium
• Welfare– Returning unskilled agents are exactly compensated
for the cost of moving back, but not for the one-time hit that made them leave
– Returning skilled agents are worse-off• They are non-marginal: for them the migration constraint is
slack. They are the only agents that can absorb the negative effects of Katrina without leaving
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Education
• Average school quality improves both for private school and for public school– Investment in public school is increasing. Skilled
agents realize it is cheaper for them to induce more unskilled agents to return through education rather than through even higher pay
– For private school: composition effect. The poorer skilled agents have left.
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Conclusion
• Overall, the balance of expected developments for the “New” New Orleans is positive– First caveat: the composition effect is ethically
problematic– Second caveat: the regularity conditions may
not be satisfied. This may produce a middle-class loss