Areas of Expertise
- Water Management
- Environment and Resource Economics
Michael Hanemann is a Chancellor's professor and Professor of environmental and resource economics in the Department of Agricultural and Resources Economics, where he has been on the faculty since 1968. Prior to coming to Berkeley, he earned a B.A. from Oxford University in Philosophy, Politics and Economics, a M.Sc. in Economics from the London School of Economics and Ph.D. in Economics from Harvard University.
Michael's research in economics has focused largely on aspects of modeling individual choice behavior, with applications to demand forecasting, inducing conservation, environmental regulation and economic valuation. He is a leading authority on the methodology of non-market valuation using techniques of both revealed and stated preference.
- Professor of Agricultural and Resources Economics, ARE Department
GSPP Working Paper (June 2005)
Urban water pricing provides an opportunity to examine whether consumers react to the
shape of supply functions. We carry out an empirical analysis of the influence of price and price
structure on residential water demand, using the most price-diverse, detailed, household-level
water demand data yet available for this purpose. We adapt the Hausman model of labor supply
under progressive income taxation to estimate water demand under non-linear prices. Ours is the
first analysis to address both the simultaneous determination of marginal price and water demand
under block pricing and the possibility of endogenous price structures in the cross section. In
order to examine the possibility that consumers facing block prices are more price-responsive, all
else equal, we test for price elasticity differences across price structures. We find that
households facing block prices are more sensitive to price increases than households facing
uniform marginal prices. Tests for endogenous price structures cannot rule out a behavioral
response to the shape of supply, but suggest that observed differences in price elasticity under
supply curves of varying shapes may result, in part, from underlying heterogeneity among utility
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GSPP Working Paper (April 2005)
In this paper we examine how one might systematically model the incidences of property created and enforced by tort law and analyze their effect on economic behavior. We then show how such a model can help provide deeper insights into the law and economics analysis of tort, using as an example the search for a unified approach to assessing compensation for nonpecuniary and pecuniary loss. The paper is organized as follows. In Section 1, we present a legal analysis of the entitlement conferred by tort law. This is then formalized in Section 2 in an economic model of the incidences of ownership defined and enforced by tort law. In Section 3 we show how this perspective on tort law can add to our understanding of the design and function of torts by re-examining the literature on insurance and tort compensation for nonpecuniary loss. We conclude in Section 4 with a summary of how tort law functions to create and protect rights in the bundle of rights that makes up property.
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GSPP Working Paper (January 2005)
There has been a lively debate about the potential impact of global climate change
on U.S. agriculture. Most of the early agro-economic studies predict large damages (see,
for example, Richard M. Adams, 1989; Harry M. Kaiser et al., 1993; and Adams et al.,
1995). In an innovative paper Robert Mendelsohn, William D. Nordhaus and Daigee Shaw
(1994) - hereafter MNS - propose a new approach: using the variation in temperature and
precipitation across U.S. counties to estimate a reduced form hedonic equation with the
value of farmland as the dependent variable. A change in temperature and/or precipitation
is then associated with a change in farmland value which can be interpreted as the impact of
climate change. Adams et al. (1998) characterize the hedonic approach as a spatial analogue
approach, and acknowledge that "the strength of the spatial analogue approach is that
structural changes and farm responses are implicit in the analysis, freeing the analyst from
the burden of estimating the e®ects of climate change on particular region-speci¯c crops and
farmer responses." On the other hand, one of the potential disadvantages of the hedonic
approach is that it is a partial equilibrium analysis, i.e., agricultural prices are assumed to
remain constant.1 While year-to-year °uctuations in annual weather conditions certainly
have the potential to impact current commodity prices, especially for crops produced only
in a relatively localized area, (such as citrus fruits which are grown mainly in California
and Florida), changes in long-run weather patterns (i.e., changes in climate) might have a
smaller e®ect on commodity prices because of the greater potential for economic adaptation,
particularly shifts in growing regions.2 The hedonic approach as implemented by MNS
predicts that existing agricultural land on average might be more productive and hence result
in bene¯ts for U.S. farmers.3 The hedonic approach has received considerable attention in our
judgment in part because the conclusions are at variance with those of some other studies that suggest warming will lead to damages and in part because of the new methodology.
Although the approach is appealing, it is at the same time vulnerable to problems related
to misspeci¯cation. Several authors have questioned the particular implementation in MNS (William R. Cline,
1996; Robert K. Kaufmann, 1998; Darwin (1999b); and John Quiggin and John K. Horowitz,
1999). Speci¯cally, they suggest that (i) the hedonic approach cannot be used to estimate
dynamic adjustment costs; (ii) the results are not robust across di®erent weighting schemes;
and (iii) the inadequate treatment of irrigation in the analysis might bias the results. The ¯rst
criticism alludes to the fact that some farmers might not ¯nd it pro¯table to switch to new
cropping patterns given their existing crop-speci¯c ¯xed capital. However, climate change
will occur only gradually and most costs can thus be seen as variable. In this paper we focus
on the latter two points, especially the role of irrigation. Previous comments have raised
theoretical concerns about potential sources of misspeci¯cation related to irrigation. We
provide an empirical test. Once irrigation is accounted for, we show that results also become
robust across weighting schemes or models. Elsewhere we extend the analysis in various
directions: construction and use of climate variables tied more closely to agronomic ¯ndings;
development of more accurate measures of both climate and soil conditions; adjustment
for spatial correlation of the error terms in a hedonic regression; and use of recent climate
scenarios that go beyond the traditional assumption of uniform impacts across regions of
a doubling of greenhouse gas concentrations in the atmosphere (Wolfram Schlenker et al.,
2004). We note here that none of the implied changes in the analysis a®ects the arguments
concerning irrigation discussed in this paper.
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GSPP Working Paper (January 2005)
We begin the paper by critically reviewing the unitary model (Vermeulen, 2002), which (1) assumes that a single preference represents all agents in the group, or equivalently, that all agents have identical preferences; (2) imposes the choice of a benevolent dictator on the group; (3) assumes the group’s budget to be a single pooled value; (4) does not allow bargaining or negotiation, (5) nor permits knowledge or experience differences between members to lead to the use of different decision-making strategies. The impact of policies affecting group members differentially, for example, cannot be correctly assessed in the unitary model because its use will lead to erroneous welfare inferences (Vermeulen, 2002). Clearly, the need for alternative models is pressing.
In the remainder of this paper we will synthesize the literature across disciplines with a view towards characterizing the shortcomings of current approaches to modeling group decisions. Subsequently we broach a number of issue areas that we believe future research must address to improve our understanding of group decisions and to enhance our ability to model and predict outcomes from such decisions. We then present a conceptual model of group decisionmaking that arose from our discussions and, we feel, synthesizes the multidisciplinary views represented in the workshop. We conclude by proposing a number of specific research questions 3 that we believe should be addressed in the short term.
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GSPP Working Paper (October 2004)
Among others who point to environmental variability and managerial uncertainty as causes of ¯shery collapse, Roughgarden and Smith (1996) argue that three sources of uncertainty are important for ¯sheries management: variability in ¯sh dynamics, inaccurate stock size estimates, and inaccurate implementation of harvest quotas. We develop a bioeconomic model with these three sources of uncertainty, and solve for optimal escapement based on measurements of ¯sh stock in a discrete-time model. Among other results we ¯nd: (1) when uncertainties are high, we generally reject the constant-escapement rule advocated in much of the existing literature, (2) inaccurate stock estimation a®ects policy in a fundamentally di®erent way than the other sources of uncertainty, and (3) the optimal policy leads to signi¯cantly higher commercial pro¯ts and lower extinction risk than the optimal constant-escapement policy (by 42% and 56%, respectively).
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GSPP Working Paper (October 2004)
Economists sometimes find themselves in the position of having to extend the
neoclassical model of consumer demand to settings where, in addition to the conventional budget
constraint, there are one or more additional linear constraints that restrict the consumer’s utility
maximization problem. Examples include point rationing [Tobin-Houthakker (1950-51), Tobin
(1952)]; models of time allocation where the time constraint cannot be collapsed into the budget
constraint [de Serpa (1971); de Donnea (1972); McConnell (1975); Lyon (1978) Larson and
Shaikh (2001)]; and multi-period portfolio allocation problems [Diamond and Yaari (1972)].
Without exception, the existing literature has focused on differential properties of the resulting
demand functions-i.e. issues such as the effect of rationing on demand elasticities, the Le
Chatelier--Samuelson Theorem, the generalization of the Hick-Slutsky decomposition, and other
comparative static results [see Kusumoto (1976), Chichilnisky and Kalman (1978), Hatta (1980),
Wan (1981) and the references cited above]. By employing some “tricks with utility functions”
in the spirit of Gorman (1976), I am able to obtain a global characterization of these demand
functions. Specifically, I develop an algorithm for deriving the demand functions that apply
when there are M linear constraints from those that apply when these is only a single constraint.
The algorithm permits one to derive all of the existing comparative static results in a simple and
compact manner. It also has some value for empirical demand analysis, because it shows how to compute the demand functions associated with maximization problems involving multiple linear constraint based on direct or indirect utility functions associated with known conventional demand functions.
The paper is organized as follows. Section 2 presents some preliminary results which are
needed for the main analysis, but are also of interest as "tricks” in their own right. Section 3
considers the utility maximization problem with two linear constraints, summarizes the existing
comparative static results, develops the new Global Representation Theorem, and shows how
this can be used to derive and sharpen the existing comparative static results. Section 4 considers
a utility maximization problem with three linear constraints and develops the analogous Global
Representation Theorem for the solution to this problem in terms of known demand functions
associated with a conventional single-constraint problem; the results developed here provide the
basis for extension to problems involving more than three linear constraints. Section 5 offers
some concluding observations.
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GSPP Working Paper (October 2004)
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GSPP Working Paper (October 2004)
We deﬁne the irreversibility eﬀect and demonstrate its importance in problems involving investment
decisions under uncertainty. We establish several analytical and numerical results that suggest both
that the eﬀect holds more widely than generally recognized, and that an existing result (Epstein’s
Theorem) giving a suﬃcient condition for determining whether the eﬀect holds can be applied more
widely than previously indicated, in particular to problems involving intertemporally nonseparable
beneﬁt functions. We further show that a low elasticity of intertemporal substitution will however
result in failure of the eﬀect, but that the eﬀect will hold if the value of information increases in
the degree of ﬂexibility.
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GSPP Working Paper (June 2004)
The magnitude of future climate change depends substantially on
the greenhouse gas emission pathways we choose. Here we
explore the implications of the highest and lowest Intergovernmental Panel on Climate Change emissions pathways for climate
change and associated impacts in California. Based on climate
projections from two state-of-the-art climate models with low and
medium sensitivity (Parallel Climate Model and Hadley Centre
Climate Model, version 3, respectively), we ﬁnd that annual temperature increases nearly double from the lower B1 to the higher
A1ﬁ emissions scenario before 2100. Three of four simulations also
show greater increases in summer temperatures as compared with
winter. Extreme heat and the associated impacts on a range of
temperature-sensitive sectors are substantially greater under the
higher emissions scenario, with some interscenario differences
apparent before midcentury. By the end of the century under the
B1 scenario, heatwaves and extreme heat in Los Angeles quadruple
in frequency while heat-related mortality increases two to three
times; alpinesubalpine forests are reduced by 50–75%; and Sierra
snowpack is reduced 30–70%. Under A1ﬁ, heatwaves in Los
Angeles are six to eight times more frequent, with heat-related
excess mortality increasing ﬁve to seven times; alpinesubalpine
forests are reduced by 75–90%; and snowpack declines 73–90%,
with cascading impacts on runoff and streamﬂow that, combined
with projected modest declines in winter precipitation, could
fundamentally disrupt California’s water rights system. Although
interscenario differences in climate impacts and costs of adaptation
emerge mainly in the second half of the century, they a
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GSPP Working Paper (February 2002)
In many areas of the world, including large parts of the United States, scarce
water supplies are a serious resource and environmental concern. The possibility
exists that water is being used at rates that exceed what would be dictated by
eﬃciency criteria, particularly when externalities are taken into account. Because
of this, much attention has been paid by policy makers and others to the use of
demand management techniques, including requirements for the adoption of speciﬁc
technologies and restrictions on particular uses. A natural question for economists
to ask is whether price would be a more cost-eﬀective instrument to facilitate water
As a ﬁrst step in such an investigation, this paper draws upon a newly-available
set of detailed data to estimate econometrically the demand function for household
use of urban water supplies. We analyze cross-sectional time-series data that track
1,082 single-family households served by 16 water utilities in 11 urban areas in the
United States and Canada. Because of the diverse multiple-block pricing structures
that abound, estimating the eﬀects of price and price structure on residential water
demand poses some challenging and interesting problems.
We ﬁnd that the sensitivity of residential water demand to price is quite low,
and that the eﬀect of price structure may be more inﬂuential than the magnitude
of marginal price itself. The household-level data we use allow us to assess the
inﬂuences on residential water demand of climate, sociodemographic factors, and characteristics of housing stock, including home vintage. Our results indicate substantial heterogeneity in likely household responses to utility demand-management
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GSPP Working Paper: 937 (November 2001)
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Albiac, J., Michael Hanemann, Javier Calatrava, and Javier Uche. "The Rise and Fall of The Ebro Water Transfer," Forthcoming, Natural Resources Journal.
This article analyzes the Ebro inter-basin transfer, which was the main project of the Spanish
National Hydrological Plan. The Ebro transfer was prompted by pervasive pressures, scarcity and
degradation of Southeastern basins in Spain. The heated policy debate on the Ebro transfer, highlights the
difficulties of achieving a sustainable water management, because of the conflicting interests of stakeholders
and regions. Alternatives to the Ebro transfer show that, acceptable outcomes combine demand and supply
measures. Nevertheless, implementation could be difficult and requires compensation to farmers, otherwise
an excessive burden on farmers would be met by social opposition leading to the failure of measures.
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Hanemann, W.H. Water Crisis: myth or reality? Eds. P.P. Rogers, M.R. Llamas, L. Martinez-Cortina, Taylor & Francis plc., London.
This chapter explains the economic conception of water -how economists think about
water. It consists of two main sections. First, it reviews the economic concept of value, explains how it is
measured, and discusses how this has been applied to water in various ways. Then it considers the debate
regarding whether or not water can, or should, be treatetl as an economic commodity, and discusses the
ways in which water is the same as, or different than, other commodities from an economic point of view.
While there are some distinctive emotive and symbolic features of water, there are also some distinctive
economic features that make the demand and supply of water different and more complex than that of
most other goods.
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Carson, R.T., et al. 2003. "Contingent Valuation and Lost Passive Use: Damage from the Exxon Valdez Oil Spill," Environmental and Resource Economics 25: 257-286.
We report on the results of a large-scale contingent valuation (CV) study conducted after
the Exxon Valdez oil spill to assess the harm caused by it. Among the issues considered are the design
features of the CV survey, its administration to a national sample of U.S. households, estimation of
household willingness to pay to prevent another Exxon Valdez type oil spill, and issues related to
reliability and validity of the estimates obtained. Events influenced by the study's release are also
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Cooper, J., W.M. Hanemann and G. Signorello. "One-and-One Half Bound Dichotomous Choice Contingent Valuation," Review of Economics and Statistics 84(4): 742-750, 2002.
Although the double-bound (DB) fonnat for the discrete choice
contingent valuation method (CVM) has the benefit of higher efficiency in
welfare benefit estimates than the single-bound (SB) discrete choice
CVM, it has been subject to criticism due to evidence that some of the
responses to the second bid may be inconsistent with the responses to the
first bid. As a means to reduce the potential for response bias on the
follow-up bid in multiple-bound discrete choice formats such as the DB
model while maintaining much of the efficiency gains of the multiplebound approach, we introduce the one-and-one-half-bound (OOHB) approach and present a real-world application. In a laboratory setting,
despite the fact that the OOHB model uses less information than the DB
approach, the efficiency gains in moving from SB to OOHB capture a
large portion of the gain associated with moving from SB to DB. Utilizing
distribution-free seminonparametric estimation techniques on a splitsurvey data set, our OOHB estimates demonstrated higher consistency
with respect to the follow-up data than the DB estimates and were more
efficient as well. Hence, OOHB may serve as a viable alternative to the
DB fonnat in situations where follow-up response bias may be a concern.
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Krosnick, J.A., et al. 2002. 'The Impact of "No Opinion' Response Options on Data Quality-Non Attitude Reduction or an Invitation to Satisfice?" Public Opinion Quarterly 66: 371-403.
According to many seasoned survey researchers, offering a no-opinion option should reduce the pressure to give substantive responses felt by respondents who have no true opinions. By contrast, the survey satisficing perspective suggests that no-opinion options may discourage some respondents from doing the cognitive work necessary to report the true opinions they do have. We address these arguments using
data from nine experiments carried out in three household surveys. Attraction to no-opinion options was found to be greatest among respondents lowest in cognitive skills (as measured by educational attainment), among respondents answering secretly instead of orally, for questions asked later in a survey, and among respondents who devoted little effort to the reporting process. The quality of attitude reports obtained (as measured by over-time consistency and responsiveness to a question manipulation) was not compromised by the omission of noopinion options. These results suggest that inclusion of no-opinion options in attitude measures may not enhance data quality and instead may
preclude measurement of some meaningful opinions.
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Li, C-Z., K-G. Lofgren, and M. Hanemann. 2002. "Real versus Hypothetical Willinigness to Accept.: the Bishop and Heberlein Model Revisited," in Bengt Kristrom, Partha Dasgupta and Karl-Gustaf Lofgren (eds) Economic Theory for the Environment: Essays in Honour of Karl-Goran Maler, Edward Elgar, pp. 205-218.
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Swait, J., et al. 2002. "Context Dependence and Aggregattion in Disaggreate Choice Analysis," Marketing Letters 13(3): 195-205.
There is an emerging consensus among disciplines dealing with human decision making that the context in which
a decision is made is an important determinant of outcomes. This consensus has been slow in the making because
much of what is known about context effects has evolved from a desire to demonstrate the untenability of certain
common assumptions upon which tractable models of behavior have generally been built. This paper seeks
to bring disparate disciplinary perspectives to bear on the relation between context and choice, to formulate
(1) recommendations for improvements to the state-of-the-practice of Random Utility Models (RUMs) of choice
behavior, and (2) a future research agenda to guide the further incorporation of context into these models of
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Chapman, D.J. and W. Michael Hanemann. "Environmental Damages In Court: The American Trader Case," In Anthony Heyes' (ed) The Law and Economics of the Environment, pp. 319-367, 2001.
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Hanemann, W.H 2000. "Adaptation and its Measurement," Climate Change 45:571-581.
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