Goldman School of Public Policy - University of California, Berkeley

Michael W. Hanemann

Emeritus and Affiliated Professor in the Graduate School

Areas of Expertise

  • Environment
  • Water Management
  • Environment and Resource Economics

Biography

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.

Other Affiliations

  • Professor of Agricultural and Resources Economics, ARE Department

Website

Working Papers

  • Do Consumers React to the Shape of the Supply?  Water Demand under Heterogeneous Price Structures

    Co-authors: Sheila M. Olmstead, Robert N. Stavins

    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
    service areas.

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  • Torts and the Protection of “Legally Recognized Interests

    Co-author: Sandra A. Hoffmann

    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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  • Will U.S. Agriculture Really Benefit from Global Warming? Accounting for Irrigation in the Hedonic A

    Co-authors: Wolfram Schlenker, Anthony C. Fisherยค

    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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  • Group Decisions: Analyzing Decision Strategy and Structure in Households

    Co-authors: Wiktor Adamowicz, Joffre Swait, Reed Johnson, David Layton, Michel Regenwetter, Torsten Reimer, Robert Sorkin

    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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  • Fishery Management Under Multiple Uncertainty

    Co-authors: Anthony Fisher, Larry Karp, Christopher Costello, Gautam Sethi

    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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  • Consumer Demand with Several Linear Constriants:  A Global Analysis

    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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  • The Impact of Global Warming on U.S. Agriculture: An Econometric Analysis of Optimal Growing Conditi

    GSPP Working Paper (October 2004)

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  • The Temporal Resolution of Uncertainty and the Irreversibility Effect

    Co-authors: Urvashi Narain, Anthony Fisher

    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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  • Emissions pathways, climate change, and impacts on California

    Co-authors: Katharine Hayhoea, Daniel Cayan, Christopher B. Field, Peter C. Frumhoff, Edwin P. Maurer, Norman L. Miller, Susanne C. Moser, Stephen H. Schneider, Kimberly Nicholas Cahill, Elsa E. Cleland, Larry Dale, Ray Drapek, Laurence S. Kalkstein, James Lenihan, Claire K. Lunch, Ronald P. Neilson, Scott C. Sheridan, Julia H. Verville

    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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  • Muffled Price Signals:  Household Water Demands Under Increasing-Block Prices

    Co-authors: Robert N. Stavins, Sheila M. Cavanagh

    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
    demand management.
    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

    policies.

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  • The Central Arizona Project

    GSPP Working Paper: 937 (November 2001)

    Download a PDF (159KB)

Selected Publications

  • The Rise and Fall of The Ebro Water Transfer

    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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  • The Economic Conception of Water

    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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  • Contingent Valuation and Lost Passive Use: Damages from the Exxon Valdez Oil Spill

    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
    briefly discussed.

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  • One-and-One Half Bound Dichotomous Choice Contingent Valuation

    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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  • The Impact of “No Opinion’ Response Options on Data Quality-Non Attitude Reduction or an Invitation

    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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  • Real versus Hypothetical Willinigness to Accept.: the Bishop and Heberlein Model Revisited

    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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  • Context Dependence and Aggregation in Disaggregate Choice Analysis

    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
    choice behavior.

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  • Environmental Damages In Court: The American Trader Case

    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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  • Adaptation and its Measurement

    Hanemann, W.H  2000.  "Adaptation and its Measurement,"  Climate Change 45:571-581.

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