Post-Katrina New Orleans:
Inequality and Schooling
S. Barbieri – J. Edwards
Tulane University
New Orleans Political Economy Workshop
Tulane University – September 2010
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
2
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
3
Introduction
•
•
First, we build a “descriptive” model
Components
1.
2.
3.
4.
Standard “General Equilibrium”
School choice
Location decision
Political determination of public services (education)
and taxation
4
Introduction
•
•
Apply Katrina – We collapse its effects into
“better” outside opportunity.
Questions – Predictions – Interpretation
1.
2.
3.
4.
Who returns? Are they better-off?
Composition of population?
After-storm income distribution?
New level of public services (education)?
5
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.
6
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
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
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.
10
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.
14
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.
15
Characterization (formal)
• Tot. endowm. goods 1 and 2: E1 and E2
• Then
16
Characterization (informal)
•
•
Economic variables
The price of the good provided by the unskilled
agents, P, is
1.
2.
Increasing in the ratio of total skilled
endowment/total unskilled endowment
Decreasing in the level of public education
provided
17
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
18
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 gm
It makes sense to pay for education only if you do a
much better job than the free option
19
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
20
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.
22
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 middleclass disappearance)
– Under standard regularity conditions, the ratio of
skilled to unskilled agents increases (consistent with
the increase in P)
23
Post-Katrina Equilibrium
Income inequality. Under standard regularity
conditions, inequality decreases
1. The “New” New Orleans is relatively more skilledintensive (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 middleclass loss
27