Post-Katrina New Orleans: Inequality and Schooling S. Barbieri – J. Edwards Tulane University New Orleans Political Economy Workshop Tulane University – September 2010

2 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

3 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

4 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

5 Introduction Apply Katrina – We collapse its effects into “better” outside opportunity. Questions – Predictions – Interpretation 1.Who returns? Are they better-off? 2.Composition of population? 3.After-storm income distribution? 4.New level of public services (education)?

6 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 4.Public services (education) improve.

7 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

8 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

9 Skilled Agents’ Endowment Distribution Population of skilled agents Endowment 1

10 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 g m 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.

11 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

12 Model Description Policy Education financed with budget-balancing proportional tax t on skilled agents’ endowment Public education level g m is chosen through the political process, taking into account all possible repercussions on prices, population, etc.

13 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 g m, no agent moves in or out of the city

14 Equilibrium Definition 3.Policy Given education choices, taxes balance the budget Fully anticipating all migration and general equilibrium effects, g m is a Condorcet winner Consequence: only skilled agents matter in the determination of g m, unskilled agents are always indifferent, so they do not vote.

15 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.

16 Characterization (formal) Tot. endowm. goods 1 and 2: E 1 and E 2 Then

17 Characterization (informal) Economic variables The price of the good provided by the unskilled agents, P, is 1.Increasing in the ratio of total skilled endowment/total unskilled endowment 2.Decreasing in the level of public education provided

18 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

19 Characterization (informal) Private school choice 1.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 g m It makes sense to pay for education only if you do a much better job than the free option

20 Characterization (informal) Public School financing –The level g m 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

21 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

22 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.

23 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)

24 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

25 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

26 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.

27 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