UC Berkeley

The sustainability of modern cities hinges on the efficient management of land and water resources. In this dissertation I use tools from empirical and spatial economics to study environmental and natural resource management challenges with a particular focus on cities in the developing and middle income world. In Chapter 1, with Carolina Rodríguez-Zamora we study the costs of and the housing market response to subsidence– the sinking of land areas due to groundwater over-extraction– in Mexico City. We propose an equilibrium model of the housing market that features housing re-development in the face of an evolving environmental hazard that has both realized and expected future impacts to home quality. Our model highlights that while realizations of subsidence attract development by lowering the opportunity cost of re-building units, information frictions affecting the capitalization of future risk lead to an over-supply of housing in risky areas. Guided by model-derived estimating equations, we exploit quasi-random variation in sinking intensity to estimate the impact of both realized and future subsidence on home values and redevelopment. We find that realized subsidence imposes substantial costs, lowering prices by 1.5% on average. However, prices are unresponsive to measures of expected future sinking, and novel survey evidence suggests that information frictions affect the ability of homebuyers to capitalize predictable future risk. Consistent with model predictions, units that have experienced more sinking are more likely to be redeveloped, as these have lower opportunity cost of being re-built. Evaluating welfare using our parameter estimates implies that current rates of subsidence cost Mexico City a total of $33 billion USD, about $18 billion of which are due to information frictions that inefficiently increase the housing stock in the riskiest neighborhoods. In Chapter 2, with Nell Green Nylen, Ellen Bruno, Andrew Ayers, Michael Kiparsky, Josué Medellín-Azuara, and Sarah Null, we analyze what the Economics literature has to say about the potential gains from policies that promote water trade. The gains from water trade vary depending on local conditions and the specifics of market design. Models of water trading necessarily rely on assumptions that simplify the social, institutional, and environmental landscape within which a water market operates. A clear understanding of these assumptions is important for understanding the literature as a whole and its practical and policy relevance. We systematically evaluate peer-reviewed papers that estimate the gains from water trading to assess how models of water markets take local context into account. Our results demonstrate that whether and how models incorporate key considerations varies widely. We find that estimates of the economic impacts of water trading in the published literature are more likely to consider distributional effects and incorporate features of the legal and regulatory environment than to account for third-party impacts, transaction costs, the consequences of trading for the economy at large, or the administrative costs associated with setting up and operating a market. Researchers modeling the gains from trade could better support local decision makers by more explicitly articulating their models' capabilities and limitations. In Chapter 3, with Rodolfo Oviedo-Moguel, we turn to land management policies that address urban sprawl in Mexico. Unregulated urban sprawl in emerging cities induces an externality on public goods providers, creating demand for investments in physical infrastructure such as road maintenance, water access and other municipal services. In this project we study the impact of a policy in Mexico that aims to mitigate this externality by limiting federally-backed mortgages to be available only in "services zones" within which residents have reasonably ready access to jobs, schools, and infrastructure. We begin by establishing a set of novel stylized facts about the relationship between public goods provision, municipal finances, and sprawl in Mexico. Then, we study the causal impact of the policy on city extent and municipal financing of public infrastructure in a cross-city analysis that exploits quasi-random variation in the tightness of these zones relative to city growth. Next, using the delimitation of this policy zone within cities in a localized difference-in-differences design, we study the impact of these restrictions on the location and characteristics of new development and costs in the form of housing prices. Finally, we develop a dynamic spatial model of forward-looking home buyers and developers to quantify the welfare implications of our empirical findings.