Essays on Urban and Labor Economics
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2011
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In the first chapter of this dissertation I develop a flexible and estimable equilibrium model that jointly considers location decisions of heterogeneous agents across space, and their optimal portfolio decisions. Merging continuous-time asset pricing with urban economics models, I find a unique sorting equilibrium and derive equilibrium house and asset prices in closed-form. Risk premia for homes depend on both aggregate and local idiosyncratic risks, and equilibrium returns for stocks depend on their correlation with city specific income and house price risk. In equilibrium, very risk-averse households do not locate in risky cities although they may have a high productivity match with those cities. I estimate a version of this model using house price and wage data at the metropolitan area level and provide estimates for risk premia for different cities. The estimated risk premia imply that homes are on average about 20000 cheaper than they would be if owners were risk-neutral. This estimate is over 100000 for volatile coastal cities. I simulate the model to study the effects of financial innovation on equilibrium outcomes. For reasonable parameters, creating assets that correlate with city-specific risks increase house prices by about 20% and productivity by about 10%. The average willingness to pay for completing markets per homeowner is between $10000 and $20000. Productivity is increased due to a unique channel: lowering the amount of non-insurable risk decreases the households' incentive to sort on these risks, which leads to a more efficient allocation of human capital in the economy.
The second chapter of this dissertation studies ability signaling in a model of employer learning and statistical discrimination. In traditional signaling models, education provides a way for individuals to sort themselves by ability. Employers in turn use education to statistically discriminate, paying wages that reflect the average productivity of workers with the same given level of education. In this chapter, we provide evidence that graduating from college plays a much more direct role in revealing ability to the labor market. Using the NLSY79, our results suggest that ability is observed nearly perfectly for college graduates. In contrast, returns to AFQT for high school graduates are initially very close to zero and rise steeply with experience. As a result, from very beginning of the career, college graduates are paid in accordance with their own ability, while the wages of high school graduates are initially unrelated to their own ability. This view of ability revelation in the labor market has considerable power in explaining racial differences in wages, education, and the returns to ability. In particular, we find a 6-10 percent wage penalty for blacks (conditional on ability) in the high school market but a small positive black wage premium in the college labor market. These results are consistent with the notion that employers use race to statistically discriminate in the high school market but have no need to do so in the college market.
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Hizmo, Aurel (2011). Essays on Urban and Labor Economics. Dissertation, Duke University. Retrieved from https://hdl.handle.net/10161/3866.
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