An Efficient Ascending Auction for Private Valuations, Journal of Economic Theory, 177: 495 - 517, 2018.
Known dynamic implementations of the Vickrey–Clarke–Groves mechanism in general private-value auction settings utilize non-linear (not additively-separable over goods) and non-anonymous (bidder-specific) prices. The need for non-linear and non-anonymous prices — a complication that is often difficult to implement in practice — arises from limiting attention to elicitation processes based on demand queries (i.e., asking bidders to report their demands at posted prices). In this paper, we relax this restriction and allow the auctioneer to supplement demand queries with marginal value queries (i.e., requests to report value differences between pairs of commodity bundles) as needed. This added flexibility enables an iterative ascending auction design that achieves efficiency despite using linear and anonymous prices.
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.
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.
The Fall of Coal: Joint impacts of fuel prices and renewables on generation and emissions, (with Harrison Fell), American Economic Journal: Economic Policy, 10 (2): 90-116, 2018. 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.
Emissions reductions or green booms? The general equilibrium effects of a Renewable Portfolio Standard, (with Antonio Bento and Teevrat Garg), Journal of Environmental Economics and Management, 90:78-100, 2018.
Renewable portfolio standards (RPS) are commonly promoted as a policy tool to reduce emissions associated with fossil generation, while also stimulating development of local renewable resource endowments. We develop a general equilibrium model of an RPS policy that captures key features such as a fixed factor renewable endowment, substitution across sectors of the economy, and endogenous price responses. We analytically decompose the effects of an RPS into a) a substitution effect, b) an output-tax effect, and c) an output effect. We show that an increase in the RPS can either deliver large resource booms or large emissions savings but not both. Our framework can translate different renewable resource endowments and pre-existing standards across states into economic and environmental impacts to inform current renewable energy and climate policies.
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, 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), 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.
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.