- Revealed Prefence and Acsavtivity Rules in Dynamic Auctions, (with Lawerence Ausubel) International Economics Review, forthcoming.
Abstract: Activity rules—constraints that limit bidding in future rounds based on past bids—are intended to limit strategic bidding delays in high-stakes auctions. This article provides a general treatment of activity rules. Traditional point-based rules are effective for homogeneous goods and reasonably suited for substitute goods. However, they are simultaneously too strong and too weak for general environments; they allow parking, while sometimes preventing straightforward bidding. We prove that the activity rule operationalizing the generalized axiom of revealed preference (GARP) is essentially the unique rule that enforces the Law of Demand while enabling straightforward bidding and never producing “dead ends”.
- 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.
- 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.
- 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.
- National Policy for Regional Development: Historical Evidence from Appalachian Highways, (with Carl Kitchens), Review of Economics & Statistics, forthcoming.
How effective are policies aimed at integrating isolated regions? We answer this question using the construction of a highway system in one of the poorest regions in the United States. With construction starting in 1965, the Appalachian Development Highway System (ADHS) ultimately consisted of over 2,500 high-grade road miles. Motivated by a model of inter-regional trade we estimate the elasticity of total income with respect to market access, which we then use to evaluate the overall impact of the ADHS. We find that removing the ADHS would have reduced the total income by $45.9 billion or, roughly, 1 percent. Ultimately, the population response to improvements in transportation infrastructure reduced the gains in income per capita, which were equal to $515 (1.4 percent) in the poorest counties. Today, the region's performance relative to the national average is similar to its position in the 1960s. Thus, despite substantial investment in transportation and some gains in income per capita the region continues to lag behind the rest of the country.
- “Microclimate Effects of Wind Farms on Local Crop Yields,” Journal of Environmental Economics and Management, 96: 159-173, 2019.
Abstract: This paper considers a novel spillover effect of wind farms - microclimate impacts on neighboring crop yields. Using US county-level crop and wind capacity data, I examine the effects of wind energy development on crop yields, controlling for timeinvariant county characteristics and state-level annual shocks. I find robust evidence that counties with increased wind power development have also experienced increased corn yields, such that an additional 100 megawatts of wind capacity increases county yields by roughly 1%. Evidence of similar effects are found for soy and hay yields; however no evidence of an effect on wheat yields is found. At recent prices, this suggests a $5.45 per megawatt-hour local benefit associated with microclimate effects from wind power.
- Non-performance Pay and Relational Contracting: Evidence from CEO Compensation, (with Jed DeVaro and Nick Vikander), The Economic Journal, 128 (613): 1923-1951, 2018.
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, 101: 476-491, 2019.
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), American Economic Review, 108(10), 2902-46, 2018.
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.
- "Estimation and Inference with a (Nearly) Singular Jacobian," (with Sukjin Han), Quantitative Economics, 10: 1019-1068, 2019.
Abstract: This paper develops extremum estimation and inference results for nonlinear models with very general forms of potential identification failure when the source of this identification failure is known. We examine models that may have a general deficient rank Jacobian in certain parts of the parameter space. When identification fails in one of these models, it becomes underidentified and the identification status of individual parameters is not generally straightforward to characterize. We provide a systematic reparameterization procedure that leads to a reparametrized model with straightforward identification status. Using this reparameterization, we determine the asymptotic behavior of standard extremum estimators and Wald statistics under a comprehensive class of parameter sequences characterizing the strength of identification of the model parameters, ranging from nonidentification to strong identification. Using the asymptotic results, we propose hypothesis testing methods that make use of a standard Wald statistic and data-dependent critical values, leading to tests with correct asymptotic size regardless of identification strength and good power properties. Importantly, this allows one to directly conduct uniform inference on low-dimensional functions of the model parameters, including one-dimensional subvectors. The paper illustrates these results in three examples: a sample selection model, a triangular threshold crossing model, and a collective model for household expenditures.
- "The Taxing Deed of Globalization" (with Peter Egger and Nora Strecker), American Economic Review, 109(2), 353-90, 2019.
Abstract: This paper examines the effects of globalization on the distribution of worker-specific labor taxes using a unique set of tax calculators. We find a differential effect of higher trade and factor mobility on relative tax burdens in 1980–1993 versus 1994–2007 in the OECD. Prior to 1994, greater openness meant that higher income earners were taxed progressively more. However, after 1994, we document a globalization-induced rise in the labor income tax burden of the middle class, while the top 1 percent of workers and employees faced a reduction in their tax burden of 0.59–1.45 percentage points.
- "Financial Development, Default Rates, and Credit Spreads," (with O. Rachedi), Economic Journal, 2019.
Abstract: U.S. corporate default rates increased dramatically from an annual average of 0.32% between 1950 and 1984 up to 1.65% since 1985. Meanwhile credit spreads rose just by 6 basis points. We argue that financial development – intended as an exogenous reduction in the fixed cost of borrowing – accounts for this evidence. In a heterogeneous firm model financial development boosts both default rates and firms’ expected recovery rates. These two effects offset each other, muting the change in the credit spreads. The model explains 63% of the rise in default rates and predicts a 6 basis point drop in the credit spreads.
- "Capital Markets in China and England in the 18th and 19th Centuries: Evidence from Grain Prices," (with Wolfgang Keller and Wang Xin) American Economic Journal: Applied Economics. (conditional acceptance).
Abstract: Based on the most comprehensive grain prices available, we employ a storage model to estimate consistent interest rates and compare capital market development in Britain and China. Interest rates for Britain were lower than China’s on average by about three percentage points from 1770 to 1860. Regional capital market integration in the Yangzi Delta comes close to the British average at distances below 200 kilometers, but at larger distances interest rate correlations in Britain are twice those of the Delta, and three or more times as high as elsewhere in China. Overall, our results suggest capital market divergence at an early date.
- Land Reform and Sex Selection in China (with Douglas Almond and Hongbin Li), Journal of Political Economy, 127(2), 000-000, 2019.
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.
- Willingness to Pay for Clean Air: Evidence from Air Purifier Markets in China (with Koichiro Ito),
Journal of Political Economy, forthcoming.
Abstract: We develop a framework to estimate willingness to pay (WTP) for clean air from defensive investment. Applying this framework to product-by-store level scanner data on air purifier sales in China, we provide among the first revealed preference estimates of WTP for clean air in developing countries. A spatial discontinuity in air pollution created by the Huai River heating policy enables us to analyze household responses to long-run exposure to pollution. Our model allows heterogeneity in preference parameters to investigate potential heterogeneity in WTP among households. We show that our estimates provide important policy implications for optimal environmental regulation.