CES-WP-08-15
You Can Take it With You: Proposition 13 Tax Benefits, Residential Mobility, and Willingness to Pay for Housing Amenities
Fernando Ferreira
June 01, 2008
The endogeneity of prices has long been recognized as the main identification problem in the
estimation of marginal willingness to pay (MWTP) for the characteristics of a given product. This issue
is particularly important when estimating MWTP in the housing market, since a number of housing and
neighborhood features are unobserved by the econometrician. This paper proposes the use of a well
defined type of transaction costs – moving costs generated by property tax laws - to deal with this type
of omitted variable bias. California’s Proposition 13 property tax law is the source of variation in
transaction costs used in the empirical analysis. Beyond its fiscal consequences, Proposition 13 created
a lock-in effect on housing choice because of the implicit tax break enjoyed by homeowners living in
the same house for a long time. First, I provide estimates of this lock-in effect using a natural
experiment created by two subsequent amendments to Proposition 13 - Propositions 60 and 90. These
amendments allow households headed by an individual over the age of 55 to transfer the implicit tax
benefit to a new home. I show that mobility rates of 55-year old homeowners are approximately 25%
higher than those of 54 year olds. Second, all these features of the tax law are then incorporated into
a household sorting model. The key insight of this model is that because of the property tax law,
different potential buyers have different user costs for the same house. The exogenous property tax
component of this user cost then works as an instrument for prices. I find that MWTP estimates for
housing characteristics are approximately 100% upward biased when the model does not account for
the price endogeneity.
32 Pages 317211 Bytes
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CES-WP-08-14
Market Forces, Plant Technology, and the Food Safety Technology Use
Michael Ollinger, Danna Moore
June 01, 2008
Economists (Ollinger and Mueller, 2003; Golan et al., 2004) have considered some of the economic forces, such as demands from major customers, that encourage plants to maintain food safety process control. Other economists, such as Roberts (2005), have identified food safety technologies that enable better control harmful pathogens. However, economists have not put the two together. The purpose of this paper is to examine the impact of economic forces, including firm effects and plant technology, customer demands, and regulation, on food safety technology use. Preliminary results suggest that customer demand has the greatest impact.
24 Pages 151887 Bytes
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CES-WP-08-13
On the Lifecycle Dynamics of Venture-Capital- and Non-Venture-Capital-Financed Firms
Manju Puri, Rebecca Zarutskie
May 01, 2008
We use a new data set that tracks U.S. firms from their birth over two decades to understand the life
cycle dynamics and outcomes (both successes and failures) of VC- and non-VC financed firms. We
first ask to what market-wide and firm-level characteristics venture capitalists respond in choosing to
make their investments and how this differs for firms financed solely by non-VC sources of
entrepreneurial capital. We then ask what are the eventual differences in outcomes for firms that
receive VC financing relative to non-VC-financed firms. Our findings suggest that VCs follow
public market signals similar to other investors and typically invest largely in young firms, with
potential for large scale being an important criterion. The main way that VC financed firms differ
from matched non-VC financed firms, is they demonstrate remarkably larger scale both for
successful and failed firms, at every point of the firms’ life cycle. They grow more rapidly, but we
see little difference in profitability measures at times of exit. We further examine a number of
hypotheses relating to VC-financed firms’ failure. We find that VC-financed firms’ cumulative
failure rates are lower than non-VC-financed firms but the story is nuanced. VC appears initially
“patient” in that VC-financed firms are less likely to fail in the first five years but conditional on
surviving past this point become more likely to fail relative to non-VC-financed firms. We perform a
number of robustness checks and find that VC does not appear to have more stringent survival
thresholds nor do VC-financed firm failures appear to be disguised as acquisitions nor do particular
kinds of VC firms seem to be driving our results. Overall, our analysis supports the view that VC is
“patient” capital relative to other non-VC sources of entrepreneurial capital in the early part of firms’
lifecycles and that an important criterion for receiving VC investment is potential for large scale,
rather than level of profitability, prior to exit.
51 Pages 216213 Bytes
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CES-WP-08-12
Neighborhood Effects on High-School Drop-Out Rates and Teenage Childbearing: Tests for Non-Linearities, Race-Specific Effects, Interactions with Family Characteristics, and Endogenous Causation using Geocoded California Census Microdata
Rhiannon Patterson
May 01, 2008
This paper examines the relationship between neighborhood characteristics and the likelihood that a youth
will drop out of high school or have a child during the teenage years. Using a dataset that is uniquely wellsuited
to the study of neighborhood effects, the impact of the neighborhood poverty rate and the percentage
of professionals in the local labor force on youth outcomes in California is examined. The first section of
the paper tests for non-linearities in the relationship between indicators of neighborhood distress and youth
outcomes. Some evidence is found for a break-point at low levels of poverty. Suggestive but inconclusive
evidence is also found for a second breakpoint, at very high levels of poverty, for African-American youth
only. The second part of the paper examines interactions between family background characteristics and
neighborhood effects, and finds that White youth are most sensitive to neighborhood effects, while the
effect of parental education depends on the neighborhood measure in question. Among White youth, those
from single-parent households are more vulnerable to neighborhood conditions. The third section of the
paper finds that for White youth and Hispanic youth, the relevant neighborhood variables appear to be the
own-race poverty rates and the percentage of professionals of youths’ own race. The final section of the
paper estimates a tract-fixed effects model, using the results from the third section to define multiple
relevant poverty rates within each tract. The fixed-effects specification suggests that for White and
Hispanic youth in California, neighborhood effects remain significant, even with the inclusion of controls
for any unobserved family and neighborhood characteristics that are constant within tracts.
64 Pages 228413 Bytes
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CES-WP-08-11
Analysis of Young Neighborhood Firms Serving Urban Minority Clients
Timothy Bates, Alicia Robb
May 01, 2008
This study empirically investigates Michael Porter’s hypothesis that urban minority
neighborhoods offer attractive opportunities to household-oriented businesses, such as retail
firms (1995). Our analysis compares the traits and performance of firms serving predominantly
minority clients to those selling their products largely to clients who are nonminority whites.
Controlling statistically for applicable firm and owner characteristics, our findings indicate that
the minority neighborhood niche does not offer young firms an attractive set of opportunities.
Relative to opportunities in the corresponding nonminority household niche and the broader
regional marketplace, the neighborhood minority household market is associated with reduced
business viability.
22 Pages 75674 Bytes
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