The Value of Climate Amenities : Evidence from U . S . Migration Decisions

There is a large literature that attempts to value climate amenities in the US and elsewhere using the fact that climate amenities are capitalized into wages and property values. Many of these estimates, which were produced in the 1970s and 1980s, assume that people are perfectly mobile and are based on estimates of national hedonic wage and property value functions. These functions will yield biased estimates of consumers’ willingness-to-pay for climate amenities if consumers are not in locational equilibrium, as may occur due to information or other moving costs. We value climate amenities by estimating a discrete model of residential location choice for households who changed metropolitan statistical areas (MSAs) between 1995 and 2000. We assume that the utility that a household derives from living in an MSA depends on climate amenities along with earnings potential, housing costs and locationspecific amenities. To avoid assuming a national labor market we estimate separate hedonic wage functions for each MSA to predict earnings opportunities in each city. Households choose the MSA where they derive maximum utility. The model is estimated using a two step procedure (Bayer, Keohane and Timmins, 2006). In the first stage, location-specific constants are estimated together with other parameters of the utility function. In the second stage, location-specific intercepts are regressed on locationspecific amenities and housing costs to estimate the average utility attached to these amenities. We find winter temperature and summer precipitation to be amenities, but summer temperature to have no statistically significant effect on migration decisions. Models estimated using “stayers” as well as movers suggest that the former are not in equilibrium; and hence that their location decisions cannot be used to estimate the value they attach to climate amenities. 1 RTI International 2 University of Maryland, College Park and Resources for the Future Preliminary Draft (Please do not cite) 2 Section 1: Introduction Concerns about climate change have renewed interest in the value US citizens place on climate as an amenity. This interest comes from two directions. One is the desire to value changes in temperature and precipitation in order to estimate the welfare effects of various climate impacts and, hence, of climate change mitigation policies. What are the welfare effects of cooler winters and wetter summers in the Southern US and warmer winters in the North, as are predicted to occur under a Business-as-Usual scenario? The second is the desire to predict movements in population that may occur in response to changes in climate. To what extent would winters have to grow warmer and drier in the Northeast and Midwest to stem the tide of migration from these regions to the South and West? More generally, what would be the impact of various climate scenarios on migration patterns in the US? This paper attempts to inform both questions by modeling the migration decisions of US households between 1995 and 2000, taking into account the role of climate in these decisions. We model the decision of migrants as a choice among 297 MSAs based on potential earnings, housing costs, moving costs, climate amenities and other locationspecific amenities. Households are assumed to choose the location from which they derive maximum utility. Under standard assumptions, the probability that the household chooses a location is given by the conditional logit model. The model is estimated in two stages, following Bayer, Keohane and Timmins (2006). In the first stage, MSA-specific constants are estimated together with other utility function parameters to explain the location choices of migrants. In the second stage, the MSA-specific constants, which may be interpreted as Quality-of-Life indices, are Preliminary Draft (Please do not cite) 3 regressed on amenities that vary by MSA to estimate the average utility attached to these amenities. This procedure allows us to identify the parameters of consumers' utility functions and in particular, the preference parameters for climate variables. There are few recent estimates of the value of climate amenities in the US. Most estimates in the literature are based on hedonic wage and property value functions, following the approach of Rosen (1974) and Roback (1982). These studies, including Cragg and Kahn (1999), Gyourko and Tracy (1991), Blomquist et al. (1988) and Smith (1983), assume that households and firms can migrate costlessly from one location to another and that, as a result, national labor and housing markets are in equilibrium. In reality, this may not be the case: for consumers, impediments to migration include transportation costs, search costs (for jobs and housing), and personal and family considerations. Firms may face barriers to entry into a region. If, as a result, national housing and labor markets are not in equilibrium, the partial derivatives of national hedonic wage and property value functions will not measure marginal willingness to pay for amenities. Cragg and Kahn (1997) overcome some of these difficulties by valuing climate amenities using a discrete model of location choice. They model the location choices of US households who moved between 1985 and 1990, who are more likely to be in locational equilibrium than all households in the population. When households choose the state in which to live, their earnings opportunities are described by state-specific hedonic wage equations. Cragg and Kahn thus avoid the assumption of a national labor market. Preliminary Draft (Please do not cite) 4 Our paper builds on and extends the work of Cragg and Kahn. Like Cragg and Kahn, we focus on migrant households. It is reasonable to assume that these households are in locational equilibrium and also reasonable to treat conditions in the housing and labor markets in each MSA as exogenous to migrants. We extend Cragg and Kahn by explicitly include moving costs, which increase as the migrant moves to a different state or a different region of the country. These costs significantly affect estimates of the value of climate amenities. Our results suggest that movers are willing to pay to avoid cold winter temperatures and snow. Summer precipitation, in contrast, is an amenity. Marginal willingness to pay for warmer winter temperature is statistically significant at the 5 percent level for temperatures between 10 and 43 degrees Fahrenheit, but decreases as temperature increases. Preliminary estimates indicate that households facing an average winter temperature of 37 degrees Fahrenheit are willing to pay approximately 3% of their income for an increase in average winter temperature by one degree. It is, however, likely that this captures the value of other climate amenities that are correlated with winter temperature, such as sunshine. Households are willing to pay 4% of their income to reduce winter precipitation from 5 to 4 inches, which corresponds to between 13 and 20 inches of snow. Willingness to pay to raise summer precipitation is significant at the 10% level between 8 and 13 inches but, surprisingly, not at lower levels of precipitation. There is no evidence that average summer temperature plays a significant role in household migration decisions. 3 Willingness to pay to reduce winter precipitation is significant only between 1 and 5 inches, suggesting that people wish to avoid snow rather than rainfall. Preliminary Draft (Please do not cite) 5 The paper is organized as follows. We briefly review the literature on valuing climate amenities in Section 2. In Sections 3 we present the household’s location decision and the econometric models to be estimated. Section 4 describes the data used in our analysis. Results are presented in Section 5. Section 6 concludes the paper. Section 2: Literature review There are two strands of the economics literature that value climate amenities. The first uses hedonic wage and property value functions to compute marginal amenity values, following Rosen (1974) and Roback (1982). The second uses discrete models of consumer location choice. The continuous hedonic approach, developed by Rosen (1974) and refined by Roback (1982) is based on the notion that people’s preferences for climate attributes should be reflected in their location decisions, and, hence, be capitalized into wages and land values: Other things equal, workers should accept lower wages to live in more pleasant climates and should be willing to pay more for housing in more desirable climates. How, in equilibrium, property values and wages vary with climate attributes depends, however, not only on consumer preferences, but also on how climate affects firms’ costs. As Roback (1982) demonstrates, equilibrium wages should unambiguously be lower and land prices higher in cities with more desirable amenities only when amenities do not directly affect firms’ costs. When they do—for example, when a firm’s costs are lower in a warmer climate—the impact of a warmer climate on wages is Preliminary Draft (Please do not cite) 6 ambiguous: workers are willing to work for less in a warmer climate, but firms are willing to pay more, other things equal. Early attempts to estimate how much consumers will pay for more desirable climates relied on estimating hedonic wage and property value functions. Assuming a national labor market, wages in different cities should reflect differences in climate amenities, holding job and worker characteristic constant. The hedonic wage function relates the equilibrium wage to job characteristics, including occupation and industry; worker characteristics (e.g., education and years of experience); and locational amenities—climate, crime, air quality, proximity to the ocean. The hedonic property value function describes how, in equilibrium, housing prices vary across cities as a function of housing characteristics and locational amenities. In equilibrium, workers will select a city (a