Post-Katrina New Orleans: Inequality and Schooling

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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
• Standard General Equilibrium
• School choice
• Location decision
• 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 Interpretation
• Who returns? Are they better-off?
• Composition of population?
• After-storm income distribution?
• New level of public services (education)?

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Introduction

• Results
• Among skilled agents, only relatively
  rich/productive agents return. Nonetheless, they
  are worse-off.
• The composition of population tilts towards a
  more skill-intensive city.
• The after-storm income distribution is likely to
  be more equal.
• - Composition effect
• - Price effect better compensation for
  returning unskilled workers
• 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
• They return in smaller numbers than skilled
  agents
• Those that return receive a better pay
• 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 agents endowm. 1

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Skilled Agents Endowment Distribution
Endowment
1
Population of skilled agents
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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
• Public school fixed level gm for free. No
  possibility to supplement.
• 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

• 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
• Location
• given P and gm, no agent moves in or out of the
  city

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Equilibrium Definition

• 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, is
• Increasing in the ratio of total skilled
  endowment/total unskilled endowment
• 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 choice
• Only rich agents privately provide schooling.
• Private vs. Public public school is free, but
  fixed at some level.
• 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
• The New New Orleans is relatively more
  skilled-intensive (composition effect)
• 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