A Practical Guide to the combinatorial Clock Auction, (with Lawrence Ausubel), The Economic Journal, forthcoming. Abstract:The Combinatorial Clock Auction (CCA) is an important recent innovation in auction design that has been utilised for many spectrum auctions worldwide. While the theoretical foundations of the CCA are described in a growing literature, many of the practical implementation choices are omitted. In this paper, we review and discuss the most critical practical decisions for a regulator implementing the CCA. Topics include: implementation of reserve prices; accommodation of technological choice; activity rules; price incrementing policy; incorporation of competition policy objectives; and bidding language and pricing rule. We illustrate our discussion with examples from recent CCA spectrum auctions.
Efficient Procurement Auctions with Increasing Returns, (with Lawrence Ausubel, Christina Aperjis and Thayer Morrill), American Economic Journal: Microeconomics, forthcoming. Abstract:For procuring from sellers with decreasing returns, there are known efficient dynamic auction formats. In this paper, we design an efficient dynamic procurement auction for the case where goods are homogeneous and bidders have increasing returns. Our motivating example is the procurement of vaccines, which often exhibit large fixed costs and small constant marginal costs. The auctioneer names a price and bidders report the interval of quantities that they are willing to sell at that price. The process repeats with successively lower prices, until the efficient outcome is discovered. We demonstrate an equilibrium that is efficient and generates VCG prices.
Corporate Cash Holdings and Credit Line Usage, (with Nathalie Moyen), International Economic Review, 57(4): 1481–1506, November 2016. Abstract:We investigate the factors driving the unprecedented rise in corporate liquidities since the 1970s. We find that an economy wide reduction in the cost of holding liquidities and an increase in risk best explain the rise in cash holdings and the widespread use of credit lines. The structural estimation results shed light on two widely-acknowledged motives for holding cash. The precautionary motive and the liquidity motive translate risk exposure into cash holdings. Our results however do not suggest that firms have become more prudent over time. It is higher liquidity needs that has forced firms to hold more cash and use more credit lines.
The Price of Imported Capital and Consumption Fluctuations in Emerging Economies, (with Michel Normandin), Journal of International Economics, 108, 67--81, 2017. Abstract: We study the role played by fluctuations in the price of imported capital in determining the behavior of consumption fluctuations in developing countries. For this, we decompose the price of imported capital into common and country-specific components, where the common component is the price of capital in the US. Empirically, we document that, in contrast to small industrialized countries, consumption in developing countries responds more than output to unexpected changes in the price of capital in the US. As such, fluctuations in the price of capital in the US contribute to a high volatility of consumption relative to that of output in developing countries. We then show that a small open-economy real business cycle model driven by fluctuations in the price of imported capital can account for the responses of consumption and output to innovations of the price of capital in the US and for the high relative volatility of consumption observed in developing country. Finally, confronting the model to the data, we further find that fluctuations in the price of capital in the US contribute substantially to fluctuations of consumption in countries that display a low volatility of output and a large relative volatility of consumption.
Roads, exports and employment: Evidence from a developing country, (with Christian Volpe Martincus and Ana Cusolito), Journal of Development Economics 125, March 2017. Abstract: Domestic road programs are often justified on the basis of their presumed positive effects on firms' exports and accordingly on firms' employment. In this paper we evaluate this policy claim for Peru, a developing country whose regions were exposed to an asymmetric infrastructure shock. In so doing, we take advantage of detailed geo-referenced data on firm-level trade for the period 2003–2010 as well as on recent and historical road infrastructure. In particular, to identify the impacts of interest, we first exploit the dimensions of this dataset to account for regional-sectoral and even firm-level confounding factors through extensive sets of fixed effects. In addition, we conduct placebo exercises and carry out instrumental variable estimations whereby we instrument recent changes in the road network with the pre-Columbian Inca road network. Estimates concur in suggesting that improvements in transport infrastructure had a significant positive impact on firms' exports and thereby on firms' job growth.
Bundled Procurement" (with Jianpei Li), Journal of Public Economics, forthcoming Abstract: When procuring multiple products from competing firms, a buyer may choose separate purchase, pure bundling, or mixed bundling. We show that pure bundling will generate higher buyer surplus than both separate purchase and mixed bundling, provided that trade for each good is likely to be efficient. Pure bundling is superior because it intensifies the competition between firms by reducing their cost asymmetry. Mixed bundling is inferior because it allows firms to coordinate to the high prices associated with separate purchase. (Pure) bundling is more likely to be selected as a procurement strategy when: (i) the products' values are higher relative to their possible costs, (ii) costs for different goods are more negatively or less positively dependent, or (iii) the cost distribution of each product is more dispersed.
An Optimal Rule for Patent Damages under Sequential Innovation, (with David Sappington), RAND Journal of Economics, forthcoming. Abstract: We analyze the optimal design of damages for patent infringement in settings where the patent of an initial innovator may be infringed by a follow-on innovator. We consider damage rules that are linear combinations of the popular "lost profit" (LP) and "unjust enrichment" (UE) rules, coupled with a lump-sum transfer between the innovators. We identify conditions under which a linear rule can induce the socially optimal levels of sequential innovation and the optimal allocation of industry output. We also show that, despite its simplicity, the optimal linear rule achieves the highest welfare among all rules that ensure a balanced budget for the industry, and often secures substantially more welfare than either the LP rule or the UE rule.
Patentability, R&D Direction, and Cumulative Innovation, (with Shiyuan Pan and Tianle Zhang) International Economic Review, forthcoming. Abstract: We present a model of cumulative innovation where firms can conduct R&D in both a safe and a risky direction. Innovations in the risky direction produce quality improvements with higher expected sizes and variances. As patentability standards rise, an innovation in the risky direction is less likely to receive a patent that replaces the current technology, which decreases the static incentive for new entrants to conduct risky R&D, but increases their dynamic incentive because of the longer duration---and hence higher reward---for incumbency. These, together with a strategic substitution and a market structure effect, result in an inverted-U shape in the risky direction but a U shape in the safe direction for the relationship between R&D intensity and patentability standards. There exists a patentability standard that induces the efficient innovation direction, whereas R&D is biased towards (against) the risky direction under lower (higher) standards. The optimal patentability standard may distort the R&D direction to increase the industry innovation rate that is socially deficient.
Selling Your Product through Competitors' Outlets: Channel Strategy When Consumers Comparison Shop, (with Sridhar Moorthy and Shervin Shahrokhi Tehrani), Marketing Science, forthcoming. Abstract: This paper develops a new rationale for decentralization in distribution channels: providing a one-stop comparison shopping experience for consumers. In our duopoly model, when consumers are knowledegeable about their brand preferences, each manufacturer would distribute through vertically-integrated retail outlets only. When some consumers are unsure about their brand preferences, however, it may be optimal for one of the manufacturers to also distribute through its competitor's outlets. The resulting equilibrium has several interesting properties. First, only one of the manufacturers chooses to add competitor-outlet distribution, not both—even when the manufacturers are symmetric. Second, the manufacturer distributing through its competitor's outlets also distributes through its own outlets, i.e., its distribution strategy is a hybrid strategy, combining vertical integration and decentralization. Third, when the manufacturers' brands are asymmetric, it is the weaker brand that has a stronger incentive to pursue hybrid distribution. Fourth, the competitor's outlets in question welcome the new brand, even when no consumer would actually buy the new brand—a case of pure showrooming. These results highlight the linkages between distribution strategy, shopping efficiency, and retail formats. Shopping costs and consumers' uncertainty about their own brand preferences create a demand for multi-brand retailing, and in pursuing this demand, manufacturers may eschew the efficiency advantages of vertical integration in favor of a hybrid distribution strategy. However, the fact that only one of the manufacturers chooses to do so suggests that this strategy also has weaknesses, which we discuss in the paper.
"Entry and Welfare in Search Markets," (with Tianle Zhang), The Economic Journal, vol. 128, pages 55-80, 2018. Abstract: The welfare effects of entry are studied in a model of consumer search. Potential entrants differ in quality, with high‐quality sellers being more likely to meet consumer needs. Contrary to the standard view in economics that more entry benefits consumers, we find that free entry is excessive for both consumer welfare and total welfare when entry cost is relatively low, and consumer welfare has an inverted‐U relationship with entry cost. We explain why these results may arise naturally in search markets due to the search variety and search quality effects of entry, and discuss their business and policy implications.
Strategic Policy Choice in State-Level Regulation: The EPA's Clean Power Plan, (with James Bushnell, Stephen Holland, and Christopher Knittel), American Economic Journal: Economic Policy, May 2017. Abstract: The EPA's Clean Power Plan sets state-level 2030 goals for CO2 emission rate reductions that vary substantially across states. States can choose the regulatory mechanism they use and whether or not to join with other states in implementing their goals. We analyze incentives to adopt rate standards versus cap-and-trade with theory and simulation. We show conditions where adoption of inefficient rate standards is a dominant strategy from both consumers' and generators' perspectives. Numerical simulations of the Western electricity system highlight incentives for uncoordinated policies that lower welfare and increase emissions relative to coordination.
When is Increasing Consumption of Common Property Optimal? Sorting, Congestion and Entry in the Commons, (with Daniel Kaffine), Journal of Environmental Economics and Management, 81: 227-242, 2017 Abstract: First-best pricing or assignment of property rights for rival and non-excludable goods is often infeasible. In a setting where the social planner cannot limit total use, we show common-property resources can be over or under-consumed. This depends on whether the external benefits of reallocating users to less congested resources outweigh the additional costs imposed by new entrants. Importantly, we show it may be optimal to encourage consumption of some common property resources. Our results have important implications for settings ranging from fisheries and forestry to recreational demand and transportation.
Changing the Rules Midway: the Impact of Granting Alimony Right on Existing and Newly-Formed Partnerships, (with Pierre-Andre Chiappori, Jeanne Lafortune and Yoram Weiss), The Economic Journal, forthcoming. Abstract: The paper analyzes the effect of a reform granting alimony rights to cohabiting couples in Canada, exploiting the fact that each province extended these rights in different years and required different cohabitation length. A theoretical analysis, based on a collective household model with a matching framework, predicts that changes in alimony laws would affect existing couples and couples-to-be differently. For existing couples, legislative changes aimed at favoring (wo)men do benefit them, especially if the match quality is low. However, for couples not yet formed, they generate offsetting intra-household transfers (in our model, of leisure) and lower intra-marital allocations for the spouses who are the intended beneficiary. Our empirical analysis confirms these predictions. Among cohabiting couples united long enough before the reform, obtaining the right to petition for alimony led women to lower their labor force participation. These results, however, do not hold –and, in some cases, are reversed -- for newly formed cohabiting couples.
World War II and the Industrialization of the American South, Journal of Economic History, 77(4): 1048–1082, December 2017. Abstract: When private incentives are insufficient, a big push by government may lead to industrialization. This paper uses mobilization for World War II to test the big push hypothesis in the context of postwar industrialization in the American South. Specifically, I investigate the role of capital deepening at the county level using newly assembled data on the location and value of wartime investment. Despite a boom in manufacturing activity during the war, the evidence is not consistent with differential growth in counties that received more investment. This does not rule out positive effects of mobilization on firms or sectors, but a decisive role for wartime capital deepening in the Souths postwar industrial development should be viewed more skeptically.
When is Increasing Consumption of Common Property Optimal? Sorting, Congestion and Entry in the Commons, (with Jonathan Hughes), Journal of Environmental Economics and Management, 81: 227-242, 2017 . Abstract: First-best pricing or assignment of property rights for rival and non-excludable goods is often infeasible. In a setting where the social planner cannot limit total use, we show common-property resources can be over or under-consumed. This depends on whether the external benefits of reallocating users to less congested resources outweigh the additional costs imposed by new entrants. Importantly, we show it may be optimal to encourage consumption of some common property resources. Our results have important implications for settings ranging from fisheries and forestry to recreational demand and transportation.
The Fall of Coal: Joint impacts of fuel prices and renewables on generation and emissions, (with Harrison Fell), American Economic Journal: Economic Policy, forthcoming 2017. Abstract: Since 2007, US coal-fired electricity generation has declined by a stunning 25 percent. Detailed daily unit-level data is used to examine the joint impact of natural gas prices and wind generation on coal-fired generation and emissions, with a focus on the interaction between gas prices and wind. This interaction is found to be significant. Marginal responses of coal-fired generation to natural gas prices (wind) in 2013 were larger, sometimes much larger, than the counterfactual with 2008 wind generation (gas prices). Additionally, these factors jointly account for the vast majority of the observed decline in generation and emissions.
Energy efficiency and emission intensity standards. (with Harrison Fell and Daniel Steinberg), Journal of the Association of Environmental and Resource Economists, 4(S1): S201–S226, 2017. Abstract: We investigate the role of energy efficiency in rate-based emissions intensity standards, a particularly policy-relevant consideration given that the Environmental Protection Agency's Clean Power Plan allows crediting of electricity savings as a means of complying with state-specific emissions standards. We show that with perfectly inelastic energy services demand, crediting efficiency measures can recover the first-best allocation. However, when demand for energy services exhibits some elasticity, crediting energy efficiency can no longer recover first-best. While crediting removes the relative distortion between energy generation and energy efficiency, it distorts the absolute level of energy services. Building on these results, we derive the conditions determining the second-best intensity standard and crediting rule. Simulations calibrated to the electricity sector in Texas find that while some form of crediting is generally welfare-improving, the proposed one-for-one crediting of energy savings is unlikely to achieve efficient outcomes.
Non-performance Pay and Relational Contracting: Evidence from CEO Compensation, (with Jed DeVaro and Nick Vikander), The Economic Journal, 2017. Abstract: CEOs are routinely compensated for aspects of firm performance that are beyond their control. This is puzzling from an agency perspective, which assumes performance pay should be efficient. Working within an agency framework, we provide a rationale for this seemingly inefficient feature of CEO compensation by invoking the idea of informal agreements, specifically the theory of relational contracting. We derive observable implications to distinguish relational from formal contracting and using ExecuComp data, find that CEOs' annual cash and equity incentive payments positively correlate with the cyclical component of sales and respond to measures of persistence as relational contracting theory predicts.
Challenges in Constructing a Survey-Based Well-Being Index, (with Daniel Benjamin, Kristen Cooper, and Ori Heffetz), American Economic Review, 107(5): 81-85. Abstract: How should a survey-based measure of well-being be implemented? How could it be constructed in a systematic and politically neutral way? These questions should be approached by economists with the same level of care that has been taken in the theoretical and practical development of GDP. We focus on two essential requirements for implementation: formulating a list of different aspects of well-being that is theoretically valid and can be measured accurately via surveys, and choosing and interpreting the survey response scales. We discuss progress to date on these issues, remaining challenges, and some possible approaches to overcoming them.
R&D Networks: Theory, Empirics and Policy Implications", (with Michael Kӧnig and Yves Zenou) The Review of Economics and Statistics, forthcoming. Abstract: We study a structural model of R&D alliance networks in which firms jointly form R&D collaborations to lower their production costs while competing on the product market. We derive the Nash equilibrium of this game, provide a welfare analysis and determine the optimal R&D subsidy program that maximizes total welfare. We also identify the key firms, i.e. the firms whose exit would reduce welfare the most. We then structurally estimate our model using a panel dataset of R&D collaborations and annual company reports. We use our estimates to identify the key firms and analyze the impact of R&D subsidy programs. Moreover, we analyze temporal changes in the rankings of key firms and how these changes affect the optimal R&D policy.
"Group-Average Observables as Controls for Sorting on Unobservables When Estimating Group Treatment Effects: the Case of School and Neighborhood Effects," (with Joseph Altonji), Forthcoming - American Economic Review Abstract: We consider the classic problem of estimating group treatment effects when individuals sort based on observed and unobserved characteristics that affect the outcome. Using a standard choice model, we show that controlling for group averages of observed individual characteristics potentially absorbs all the across-group variation in unobservable individual characteristics. We use this insight to bound the treatment effect variance of school systems and associated neighborhoods for various outcomes. Across four datasets, our most conservative estimates indicate that a 90th versus 10th percentile school system increases the high school graduation probability by between 0.047 and 0.085 and increases the college enrollment probability by between 0.11 and 0.13. We also find large effects on adult earnings. We discuss a number of other applications of our methodology, including measurement of teacher value-added.
A tale of two tails: Productivity distribution and the gains from trade, Journal of International Economics,Volume 104, 2017, Pages 44-62, 2017. Abstract: I use firm-level data to show that neither the Log-normal nor the Pareto distribution can approximate the shape of the productivity distribution along the entire support. While the former underpredicts the thickness of the right tail, the latter does not capture the shape of the left one. Using empirical distribution as a benchmark, I show that such inaccuracies lead to sizable errors in the estimates of the gains from trade in models featuring firm selection. I propose using a mixed distribution which models the left tail as Log-normal and right tail as Pareto and produces negligible errors in quantitative analysis.
Market Structure and Broadband Internet Quality, (with G. Molnar), Journal of Industrial Economics, forthcoming. Abstract: This paper investigates the effects of the number of firms and their product-type on broadband Internet quality. We estimate a model that relates the actual speeds delivered in census block groups to the number of wireline and wireless Internet service providers (ISPs), cost and demand conditions, and correction terms for the endogeneity of market structure. Model estimates show four main findings. Wireline speeds are often higher in markets with two or more wireline ISPs than with a single wireline ISP. Excluding the correction terms from the analysis understates this effect. Increases in wireline speeds are larger in the upstream direction, and there is no relationship between wireline speeds and the number of wireless ISPs.
Land Reform and Sex Selection in China (with Douglas Almond and Hongbin Li). Journal of Political Economy, accepted. Abstract: Following the death of Mao in 1976, agrarian decision-making shifted from the collective to individual households, unleashing rapid growth in farm output and unprecedented reductions in poverty. In new data on reform timing in 914 counties, we find an immediate trend break in the fraction of male children following rural land reform. Among second births that followed a firstborn girl, sex ratios increased from 1.1 to 1.3 boys per girl in the four years following reform. Larger increases are found among families with more education and in counties with larger output gains due to reform. Proximately, increased sex selection was achieved in part through prenatal ultrasounds obtained in provincial capitals. The land reform estimate is robust to controlling for the county-level rollout of the One Child Policy. Overall, we estimate land reform accounted for roughly half of the increase in sex ratios in rural China from 1978-86, or about 1 million missing girls.