Discussion Paper

No. 2017-88 | October 20, 2017
Bobos in paradise: urban politics and the new economy

Abstract

This paper provides some elements to explain the observed takeover in some urban areas of a new kind of elite associated with new economy jobs, also known as ‘bourgeois boheme’ (bobos). This takeover has been associated with greater investment in urban amenities and ‘clean’ means of transport, with adverse effects on commuting time. The model allows us to explain those developments by productivity growth in the new economy, and by the differences in production processes between the new and old economies. The consequences of bobo takeover for house prices and employment of unskilled service workers are also discussed. A bunkerized equilibrium in which skilled workers in the old economy no longer reside in the city and have been replaced by service workers is studied. In such an equilibrium urban amenities are at their maximum and commuting flows have been eliminated. For some parameter values, bobos are better-off under bunkerization, in which case they may gain by favoring it with a ‘diversity’ subsidy for unskilled workers to reside in the city.

JEL Classification:

H7, R3, R4, R5

Assessment

  • Downloads: 376

Links

Cite As

Gilles Saint-Paul (2017). Bobos in paradise: urban politics and the new economy. Economics Discussion Papers, No 2017-88, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2017-88


Comments and Questions


Anonymous - article review
October 21, 2017 - 11:45

It looks like have some Tiebout foot voting. A comment in this connection would be welcome


Anonymous - Referee report 1
November 29, 2017 - 15:07

see attached file


Anonymous - Referee report 2
November 29, 2017 - 15:09

The paper sets out to explain the stylized fact that cities have been transformed over the last quarter century. Though the paper could be improved by making these more explicit, the stylized facts seem to be, 1) housing prices have increased---in some cases dramatically 2) cities have focused more on ...[more]

... livability amenities such as parks, green space, bike lanes, and less traffic, and 3) despite increases in housing prices there is political ambition for low-income housing within the city.
The paper uses the words Bobos and Cadre to describe the new and the old economies and builds a model to better understand the implications for cities as the economy shifts. In the model, this transition occurs because the productivity of the bobos increases relative to the cadre. The key difference is that cadres’ labor is complementary to land while bobos’ is not.

Overall, the paper is very interesting and on an extremely important topic. The paper is well executed. As such, for brevity, my comments will build off of the paper without adequately summarizing it. The proposed mechanism is plausible and certainly is something researchers in the area should be aware of.

Before exploring the implications of the model, it is useful to take a step back and consider other potential mechanisms that could explain these stylized facts. I will focus on two. The first, being a mechanism of housing vintage. One predictor of gentrifying areas is the vintage of the housing stock---said differently, has a given building passed its scrap value, and it is time to rebuild. Then, if individuals have a preference for new, you would observe a movement into cities, with higher housing prices---some due to a newer vintage. You could also see the increase in amenity spending as an incentive for developers to build new housing as these amenities will be capitalized into the new housing prices.
The second explanation is that cities provide agglomeration benefits and these benefits are particularly beneficial for new industries. For example, initially, a large percentage of car manufacturing in the United States was concentrated in and around Detroit, MI. As the industry matured, manufacturing spread out because the gains from agglomeration had already been gained. Amenities such as green space and de-emphasizing commuting are both complementary amenities to agglomeration, which is why cities may invest in them. Agglomeration is an important factor driving city formation and growth, and it is somewhat weird to have a model of cities without it.
While these two other explanations seem to also match the stylized facts of the paper, the question, mostly left to the reader, is whether the explanation the paper provides can produce insights into these stylized facts.

The engine of the model is the productivity between the cadre and bobos production functions. When productivity is sufficiently higher in the cadre production function, the cadres make more money because they earn their marginal product, and can afford to commute. However, in a bunkerized city, there is no commuting, cadres all live in the suburbs, and bobos want to subsidize housing to lower service prices within the city---which only they and service workers live in. (My explanation here is an oversimplification as the mechanism requires the subsidization to influence of equilibrium change from regime II to regime III).

One differentiating feature of the model is that housing prices do not necessarily increase with amenities---as is true in models of Rosen (1982) and Roback (1982). The key difference is commuting costs that work as a negative productivity shock in the model. This lends additional support for new empirical papers that estimate amenities level explicitly taking commuting and densities into account, see for example Seegert (2016).

Ultimately, whether the transition from land-intensive to land-insensitive production is an important mechanism driving the evolution of cities is an empirical question. The paper provides some propositions that future researchers can use to provide evidence either in support or against the importance of this mechanism. First, the model predicts a rise in housing prices during the transition from old to new economies with housing prices leveling off after (proposition 4). This proposition may be difficult to test given the interaction with population growth and change in housing vintage that surely will conflate this test.

Several implications from the model seem to heavily rely on simplifying assumptions, which make empirical inference difficult. For example, in the bunkerized city, an increase in productivity in the new economy does not affect the level of services in the city because the level of services is constrained by the amount of housing in the city left for service workers. This causes the price of services and housing to go up. The amount of housing is likely to increase, however, making the empirical inference more difficult.

The paper concludes by providing suggestive evidence in support for their mechanism. Specifically, the paper finds that cites that invested more in amenities 1) are those with more bobos, 2) experienced larger growth in housing prices, and 3) raised low-income housing subsidies. The link to actual experiences of cities is a great addition to the paper.

Overall, the paper tackles an important aspect of city evolution and adds to a growing literature on the dynamics of cities---clearly the frontier of urban economics. As this paper demonstrates, dynamic models---even with simplifications---can become intractable (for example, the lack of uniqueness of equilibria and the difficulty of determining when a city will transition). The paper overcomes this limitation through numerical simulations, general comparative statics, and supportive empirical work.

Future work is needed to better link the model predictions to empirically testable implications. In particular, implications that would differentiate the bobos mechanism from other potential mechanisms.

Roback, Jennifer. "Wages, rents, and the quality of life." Journal of political Economy 90.6 (1982): 1257-1278.
Rosen, Sherwin. "Wage-based indexes of urban quality of life." Current issues in urban economics 3 (1979): 324-345.
Seegert, Nathan, Land Regulations and the Optimal Distribution of Cities (December 10, 2011). Available at SSRN: https://ssrn.com/abstract=2557399 or http://dx.doi.org/10.2139/ssrn.2557399


Gilles Saint-Paul - Reply
December 12, 2017 - 13:13

Dear referees,
Thank you for your comments and your time devoted to reading my paper. I will submit a revised version in due time that incorporates your suggestion as much as possible.
Best regards
Gilles Saint-Paul